Jobs

Jobs and Employment

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Welcome to this section exploring jobs and unemployment. We will explore a variety of aspects of unemployment, including its definition, how it is measured, types of unemployment, and the possible impacts of rising unemployment.

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The SQA Higher Economics specification for this section

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What is Unemployment?

An individual is unemployed if they are able and willing to work, or actively seeking employment, but are unable to find suitable job opportunities (ONS). If a person is actively seeking work in the previous 4 weeks and ready to work in the next 2 weeks, then they are considered unemployed.

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Task: It is important for us to differ between someone who is recorded as unemployed, and someone who is out of employment but not actively seeking employment. We classify these people as economically inactive. Could you suggest some examples of people who may not be in employment, but would not be recorded as unemployed?

How is Unemployment Measured?

The Labour Force Survey (LFS): The Labour Force Survey is a quarterly study of the employment circumstances of the UK population, conducted by the Office for National Statistics (ONS). The LFS surveys a representative sample of the country, typically 1 million people, and seeks to categorise individuals into one of employed, unemployed and economically inactive.

Claimant Count: The Claimant Count measures the unemployment levels based upon the level of individuals who are eligible to claim unemployment-related benefits from the government. It is collated by the Department for Work and Pensions (DWP) and measures the number of people measured as unemployed and actively receiving help from the government. Most commonly, the Claimant Count includes people receiving Jobseeker’s Allowance and Universal Credit.

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The following graph compares the measurements of the Claimant Count and the Labour Force Survey. Despite using different methods of recording unemployment levels, both display trends in unemployment similarly, showing that they do a good job at measuring unemployment.

The Fraser of Allander Institute regularly publish reviews of the Scottish labour market, and assess the levels of employment and activity in Scotland. If you are interested in learning more about Scotland’s labour market then follow the following link:

Economic inactivity and ill-health in Scotland | FAI

Inactivity is an indicator of the state of the labour market that measures how much of the population is not in work and is not ready to start work in the near future. It is typically calculated…

fraserofallander.org

Economic inactivity and ill-health in Scotland | FAI

Below are some of the key takeaways from this report:

Since the beginning of the Covid-19 pandemic, economic activity among working-age people has risen
Economic inactivity due to ill-health has risen most notably since the Covid-19 pandemic, it is unclear whether this is due to ‘Long-Covid’
There has been a significant rise in economic inactivity due to depression or mental illness since 2019

Types of Unemployment

Cyclical Unemployment

Cyclical unemployment refers to unemployment that occurs as a result of fluctuations in the business cycle or economic activity. During a recession, economic activity decreases which results in lower output and consumer spending, which can result in individuals being made unemployed.

What do economists mean by a recession? Quite simply, a recession can be defined as a significant decline in economic activity that lasts for a prolonged period which has significant negative impacts for those in the economy. A decline in economic activity is officially recorded as a recession after two consecutive quarters of contractions in GDP.

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Can you suggest some regularly seen examples of cyclical unemployment?

Structural Unemployment

Structural unemployment is the type of unemployment which often occurs after structural changes/significant changes to the economy. If there is significant structural change in an economy such as the closure or partial closure of a sector, then the economy often takes time to adapt.

This can often occur as a result of a skill shortage, the closure of an entire sector might result in demand for certain skills decreasing significantly.

The Mining Strikes of 1984/85:

There is perhaps no greater example of structural unemployment than the closure of a significant amount of mines in the 1980’s by Margaret Thatcher’s Conservative government. Thatcher believed that due to the increased availability of foreign imports of oil and gas, the British coal sector had become too costly and not worthwhile, and should be shut down.

Closure of coal mines was heavily contested and led to widespread mining strikes nationwide. Structural unemployment goes some way to explaining why mine closures were met with such widespread anger. The closure of the sector resulted in significant unemployment as the skills possessed by miners were no longer required. This resulted in the need for miners to retrain to find employment in another sector, or face unemployment. Resultantly, this closure contributed heavily to rising unemployment rates in the UK in the 1980’s.

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Whilst the mining reform was a significant contributor to the soaring unemployment rates of the 1980’s, significant economic uncertainty was also to blame. The UK Government implemented tight monetary policy, raising interest rates while attempting to curb inflation.

The Legacy of Structural Unemployment: Fast-forward to the present day United Kingdom and we can witness first-hand the long-term impact of structural unemployment. In 2023, it was announced that Jaguar Land Rover would be opening a £4bn factory in the United Kingdom, presenting significant economic benefit.

However, the generational reduction of manufacturing jobs in the UK has led to a skill-shortage to fulfil the 4000 jobs that this project will create. Make UK estimates that 36% of vacancies in manufacturing are difficult to fill as there is a skill shortage among applicants. Despite the strengthening of the manufacturing sector in the UK, it’s success is still suffering from the downturn over the 20th century.

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The threat posed by structural unemployment is particularly relevant of late, as we aim to transition from the burning of fossil fuels to more environmentally sustainable energy sources. However, if we were to simply shut down all fossil fuel companies immediately, there would be significant and damaging unemployment increases. During the transition towards net-zero, governments must prioritise retraining and upskilling workers in threatened sectors as to avoid substantial job losses.

If you would like to learn more about the Scottish Government’s roadmap to safely transition away from fossil fuels:

Scotland's Energy Strategy and Just Transition Plan: Ministerial statement

Statement by Cabinet Secretary for Net Zero, Energy and Transport Michael Matheson in the Scottish Parliament on Tuesday 10 January 2023.

www.gov.scot

Scotland's Energy Strategy and Just Transition Plan: Ministerial statement

Frictional Unemployment

Frictional unemployment refers to when people are transitioning between employment, or are students entering the workforce for the first time. When entering the workforce or between jobs, it typically takes time for individuals to find new employment opportunities and roles. This is a relatively constant level of unemployment in a typical economy. Frictional unemployment is calculated by dividing workers actively seeking a job by the total labour force.

Regional Unemployment

Regional unemployment is a form of structural unemployment. It occurs when structural unemployment affects localised areas of the economy.

The Choppy History of the River Clyde:

Throughout the early 20th century, Glasgow’s shipbuilding industry, along the River Clyde, was booming and accounted for a significant portion of employment opportunities. However, the 1960/70’s gave rise to a substantial decline in demand due to increased international competition, rising costs and changes in global shipping trends. Decreasing demand contributed to rising unemployment in the industry, particularly in Glasgow. This gave rise to the increase in regional unemployment in Glasgow. The rise in unemployment had damaging knock on effects in the city of Glasgow, due to the skills possessed by the shipbuilders being required less. Resultantly, there was the increased need for retraining, government support, and increasing the diversity of industries in Glasgow. If you want to learn more about Glasgow’s history of shipbuilding follow the link below:

Govan: A shipbuilding history

Scotland was once the shipbuilder to the world and the heart of its industry was sited on the south bank of the River Clyde in the Glasgow district of Govan.

www.bbc.co.uk

In the present day, the River Clyde is beginning to return as Glasgow’s leading centre of industry as it houses a variety of businesses such as financial services, digital media and tourism. Interested in the regeneration of Glasgow’s River Clyde? Read more about it here:

Clyde Waterfront regeneration: River Clyde urban renewal & development

Find details of Clyde Waterfront regeneration - urban renewal & development of River Clyde. New housing, office space & leisure attractions will transform waterfront.

www.clydewaterfront.com

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Did you know? In response to the decline of the traditional manufacturing sector which threatened further regional unemployment in Glasgow. AMIDS (Advanced Manufacturing Innovation District Scotland) has been developed near Glasgow with the aim of enhancing advanced manufacturing, research and development, and green practice. Advanced manufacturing refers to the use of cutting-edge technology and processes designed to modernise the manufacturing industry, and bring it in to the modern day.

What are the Impacts of Unemployment?

Impacts of Unemployment on Individuals

Loss of Earnings: Involuntary unemployment can result in significant consequences for individuals. Firstly, the loss of employment means the loss of wages. A reduction in earnings could mean a reduction in disposable income, and a lower ability to consume goods.

This is likely to cause a decrease in individuals’ consumption and investment in the economy as they simply cannot afford it. However, prolonged unemployment can result in the inability to afford basic necessities. In the United Kingdom however, we do have governmental support in the form of benefits such as universal credit, to support those who are unemployed.

Future Employment Prospects: People can often spend significant portions of time out of employment, which can in turn harm future employment prospects and elongate high unemployment rates. Economists refer to this as the hysteresis effect. If individuals are removed from employment, they may miss training and growth opportunities and become demotivated. Employers are often hesitant to hire individuals who have been out of employment for prolonged periods, which makes it more difficult to find new employment.

The following graph shows that economic inactivity (people not participating in the labour force) in the UK has risen since January 2019. Further inspection displays that inactivity has risen partially due to the rising number of people inactive due to long-term ill health since the Covid-19 pandemic. However, the number of students (counted as inactive) has also risen.

The Fraser of Allander Institute regularly publish commentaries surrounding labour market trends and discussions surrounding possible inactivity. If you wish to learn more about labour market activity, and the potential reasons for inactivity:

Trends in Economic Activity | FAI

Trends in economic activity across the Scottish labour market.

fraserofallander.org

To quickly summarise the key labour market issues in Scotland:

Following the Covid-19 pandemic, economic inactivity increased
Over 29% of economic inactivity in Scotland can be explained by long-term illness, this has increased significantly following the Covid-19 pandemic
Economic inactivity has however partially increased due to a recent increase in the percentage of students in Scotland (we classify students as economically inactive!). The country witnessed a student increase due to the Covid-19 pandemic encouraging people to reconsider career plans

Impacts of Unemployment on Firms

Large Labour Pool: Despite the obvious negative economic implications of rising unemployment, firms can witness positive effects. As unemployment grows, the size of the labour pool grows and firms will have a larger choice of workers. Furthermore, as the supply of workers is high then they may be able to offer lower wages while still attracting staff.

Decreased Consumer Demand: Rising unemployment also presents significant challenges for businesses. As unemployment decreases earnings and disposable income, we can expect that overall consumer demand will also decrease. As consumer demand decreases, we can anticipate that a decrease in demand for goods and services may harm company performance.

Decreasing Investment: A reduction in income and performance for both individuals and firms is ultimately expected to cause a decrease in investment in the economy. As individuals have lower disposable income, they are likely to decrease investment levels.

Elasticity: During high unemployment, not all goods and services will bear the same effect. Demand for basic goods such as bread and toilet roll is likely to remain the same. On the other hand, demand for luxury goods and services (restaurants, flights) is likely to suffer due to decreasing demand. This introduces the economic concept of elasticity.

Overall Economic Impact of Unemployment

Decreased Consumer Spending: We have identified that both earnings and consumer demand decrease, decreasing spending and harming the performance in the economy. On the whole, money flow and economic performance will decrease which leads to the risk of further rises in unemployment.

Reduced Tax Revenue: In the tax section, you will recall we identified that in the UK, employees pay direct tax in the form of income tax on earnings. Resultantly, if the level of employment in the economy decreases then we would expect that the level of income tax paid will decrease accordingly. In short, a rise in unemployment causes a decrease in income tax paid and decrease government revenues. This ultimately can cause the government deficit to rise and potentially create the need for austerity measures.

The below graph displays the revenue generated in the UK to fund government spending. We can see that income tax (purple) is the largest source of revenue for UK spending, indicating that an increase in unemployment would have significant negative consequences for the government.

Covid-19 and Unemployment

In March 2020, the outbreak of the Covid-19 pandemic led to the unprecedented introduction of lockdowns in the United Kingdom and worldwide. The increased financial uncertainty and significantly reduced ability to attend non-essential businesses and travel led to a significant decrease in consumer demand. While often an economic downturn is associated with a steep rise in unemployment, such an increase was not seen in the UK. The below chart demonstrates visually that the UK witnessed a smaller increase in unemployment than one might expect, whereas the United States experienced a significant rise.

Why did the UK achieve a lower rate of unemployment? The UK implemented the Job Retention Scheme (Furlough Scheme) which provided financial assistance to employers to retain their employees and fulfil 80% of their salaries even if they were unable to work. As such, the government had the ability to cover a significant portion of employees wages and maintain lower unemployment rates. If someone earned £20,000 p/year, the government paid £16,000 of this salary (excluding tax), allowing workers to maintain a stable income.

On the other hand, the USA opted not to implement an official employment protection scheme. Instead, the government expanded unemployment benefits to those who lost their jobs during the pandemic in the form of regular payments. This partially explains why the USA unemployment rate rose significantly higher than in the UK.

If you wish to find out more about the Coronavirus Job Retention Scheme and the impact it had in the United Kingdom:

Coronavirus Job Retention Scheme: statistics - House of Commons Library

This paper provides statistics and analysis of the Coronavirus Job Retention Scheme.

commonslibrary.parliament.uk

Coronavirus Job Retention Scheme: statistics - House of Commons Library