Unemployment - The Basics

Unemployment - The Basics

For most people, an unemployed person is somebody who is not employed. Unfortunately, economists would never make it that easy! There are many people in the UK economy who are in the population of working age (i.e. aged between 16 and 65, or 16 and 60 for females) and not working, but are not 'officially' unemployed. These people are inactive members of the population of working age. They include housewives/househusbands who stay at home, students who do not get a part-time job (an increasingly diminishing group!) and those who retire early.

To be an active member of the population of working age, and therefore part of the working population, you have to either be in employment or registered unemployed.

Unsurprisingly, the activity rates for males in the UK are over 90% from age 20 onwards, although it does start to fall after the age of 50 as some workers take early retirement. Less than 80% of males are 'active' in their mid 50s, and less than 60% are 'active' in their 60s.

The female activity rates have risen as more women have decided to have careers in the last 20 years. The figure is still lower than for males, though, at around 80%, after the age of 20. This falls to below 60% as they approach retirement age in their mid 50s.

To be registered as unemployed, you have to willing and able to work, available for work at the given wage and actively seeking work. But even the definition of being 'registered' as unemployed has changed over the years. It used to mean anyone who was claiming unemployment benefit, but the rules have changed as to which type of benefit one can claim when out of work. Many, for example, are paid disability benefit (even if their disability is relatively minor) so that the government can keep the 'official' unemployment figures down. So the official figures are probably a little inaccurate. For this reason, the government now publish figures based on a survey. Details of the two measures are outlined below.

The claimant count

This includes all those who are unemployed and actually claiming benefit in the form of Jobseekers Allowance. As we said above, claimants must be available to work, actively seeking work and able to work when the benefit is claimed.

This measure is felt to be inaccurate because it omits many people who are, effectively, unemployed but are not actually claiming benefit. There have been 30 changes to the way in which this measure is counted over the last 20 years, and only one of those changes made the number rise!

In the late 80s, it was decided that all 16 and 17 years olds did not count, because they could either stay in education or get government training. More recently, it was decided that one could only claim Jobseekers Allowance for six months, rather than twelve. Many unemployed women do not collect Jobseekers Allowance; otherwise they cannot claim other important benefits.

The figures are seasonably adjusted to allow for changes in unemployment that occur naturally over the year. There tends to be seasonal employment in the summer at tourist resorts and at Christmas.

Unemployment in the UK based on the claimant count in July 2000 was 1,070,000. This represented 3.7% of the working population (or workforce). This 3.7% is known as the unemployment rate. It is widely recognised as a more useful figure than the absolute numbers unemployed. A bald figure in millions can mean very little, but the unemployment rate gives a figure relative to the number of people in the workforce.

The ILO measure

For a more realistic count, and for international comparisons, the ILO (International Labour Organisation) measure is used. It is based on a survey, so all those that are effectively unemployed, but do not claim the highly specific Jobseekers Allowance can be included.

Those who are part of this measure but not included in the claimant count include the young unemployed who are not always eligible to claim, married women who can't claim if their husband is earning enough, and those who claim sickness and invalidity benefits. Many only slightly inconvenienced unemployed workers are paid these benefits rather than swell the claimant count of unemployment.

Not only is this measure more accurate, but it can be used for international comparisons, as this survey is taken in most developed countries. The unemployment rate using this measure for July 2000 was 5.5%.

Examiners often set data response questions using employment and unemployment data. Sometimes the data can be confusing; employment and unemployment levels are both rising (or vice versa). If employment levels are rising, then surely unemployment must be falling? It makes sense, doesn't it?

Remember that the numbers in the working population are not fixed. There are currently just fewer than 29 million people in the UK working population. Just over one million of them are unemployed, so just fewer than 28 million are employed. If the numbers in the working population stay the same, and unemployment rises then employment must be falling. But what if the numbers in the working population are rising? It is possible that both the numbers employed and the numbers unemployed will rise.

In the 80s, the numbers unemployed rose from just over one million to well over three million. But at the same time, the numbers employed rose by about one million. The answer to this conundrum is that the numbers in the working population must have risen by three million. There are two main reasons for this. At the time the number of school leavers rose substantially as an inevitable result of the baby boom of the late 60s. Also, many females came back into the workforce, working part-time as well as looking after the family.

A historical prospective

The post-war story of unemployment has two main chapters - the period when full employment was one of the main goals of government policy (up to the 70s) and the period when it wasn't (the 80s onwards). The diagram below is a sketch showing the unemployment rate since 1950.

Unemployment rate

The diagram shows the long-term trends rather than any short run fluctuations. I think you can see from the diagram the two chapters identified above. Up until the 70s, the UK was, effectively, experiencing full employment. Although there was some unemployment (a rate of around 2%) this was accounted for almost entirely by people taking a break from employment to look for a better job (frictional unemployment - see the next Learn-It).

The oil shocks and trade union militancy did little to help the situation in the 70s, and the unemployment rate began to rise. But it was the 80s where we saw the real expansion in unemployment. Full employment was definitely not on the agenda. Thatcher's main goal was the control of inflation. To this end, interest rates were kept high, the £ was, therefore, also high (partly due to being a petro-currency) and so industry suffered. Some argued that there was a lot of 'deadwood' (inefficient workers) in UK industry and a good shake out was required. Productivity was low and many firms had two people doing a job that only one would be expected to do nowadays. Unemployment rose but industry became more efficient, which boded well for later years. Also, the process of deindustrialisation did not help.

The boom of the late 80s saw unemployment fall quickly to 5% of the workforce (just under 1.5 million), but the subsequent recession saw the rate rise back up to 10%. The recovery that followed Black Wednesday again caused unemployment to fall steadily. The current rate of below 4% is now the lowest since the 70s.

Notice, though, that the rate stayed above 5% for twenty years. Many people became long term unemployed, especially those who had lost their job in a traditional industry after years of working there. Also, many young men went straight from school to unemployment and stayed there in the 'Catch 22' situation - no job without experience, but no experience without a job. A whole host of supply side policies (see the topic called 'Aggregate demand and aggregate supply') through the 80s and 90s have helped get many of the long-term unemployed back to work. The question now is, how low can unemployment go? Will it even get back down to the levels of the 50s and 60s, or do we now just have a higher 'natural rate'?

An international perspective

It is interesting to note that the changes in the rates of unemployment are quite similar in other countries. Nearly all countries had low unemployment after the war and they almost all saw rises in the 70s and 80s (Sweden and Japan did not). To be fair, the rise in the UK was higher than in all other countries, but the trend was similar.

Interestingly, the fall in unemployment in the 90s has not happened in all other countries. The UK and the US have seen big falls, but Germany and France have not. One feels sorry for Germany, who had to go through the unification process, but France has no excuse.

There are many reasons for the recent differences. One is that the painful decisions taken by the UK in the 80s (on the supply side) caused many job losses, but made the economy leaner and fitter for the rigours of the 90s. The labour market is now more flexible and able to adapt to changes in the structure of the economy. The fact that the economy was in good shape (creating demand for workers) also helped.