|
|
Consequences of Unemployment There are economic and social costs of unemployment 1. Economic costs Persistent unemployment is a sign of market failure because unemployment is a waste of scarce resources and leads to a loss of potential output and a reduction in allocative efficiency. Therefore the economy is operating below the maximum output it could achieve. This might be illustrated by making use of a PPF. Making people unemployed means a waste of those resources invested in training and educating workers. The longer a person’s period of time out of work, the greater the loss of skill and motivation. A high rate of long term unemployment can therefore have a negative effect on a country’s economic growth potential. High unemployment also affects government finances through higher benefit payments plus falling revenue from income tax, NI and VAT. There is a strong link between unemployment and consumer spending. As consumer’s confidence falls, so the willingness of people to spend declines and people build up their precautionary savings. Hysteresis effects The hysteresis effect describes a possible consequence of a country experiencing persistently high rates of long term unemployment. It refers to the economic costs of unemployment because of the damage that unemployment does to the skills and employability of those people out of work. The longer someone is out of work, the less attractive they become to a potential employer. The longer someone is out of work the greater their loss of technical and social skills needed at work. People become less willing to seek work and an increase in “core” structural unemployment and a consequent rise in the natural rate of unemployment occurs. 2. Social Costs of Unemployment Rising unemployment is linked to social deprivation leading to negative externalities. There is some relationship with crime, and social dislocation (for example via increased divorce rates, worsening health and lower life expectancy). Areas of high unemployment see falling real incomes and a worsening in inequalities of income and wealth. How to reduce unemployment Demand-side and supply-side policies can be used to improve the working of the labour market. Supply side policies Aim to reduce immobility of labour. Immobility in terms of changing job (Occupational immobility). Immobility of labour is a cause of market failure and structural unemployment. Supply side policies addressing occupational immobility aim to provide:- Workers with skills required by the labour market incentives to find work. Providing workers with the right skills · education and work placed training can be used to increase the human capital of unemployed workers. · This then helps to ensure more of the unemployed have the right skills to take up the available job opportunities. Providing incentives to find work through benefit and tax reforms a policy that reduces the real value of welfare benefits might increase the incentive for the unemployed to take a job. targeted measures to improve people’s incentives, including the linking of welfare benefits to participation in genuine work experience programmes such as the New Deal programme the introduction of lower marginal income tax rates for people on low incomes might have a noticeable impact. Demand-side policies 1. Reflating the economy would lead to greater demand for labour:- Govt could use macro-economic policies to increase AD and thereby generate a higher level of national income and employment. Reflationary policies can help to mitigate the effects of an economic recession but there are risks involved in using both fiscal and monetary policy simply to boost demand when output is low. 2. Regional policies would increase demand for labour in those regions:- use regional policies to encourage both national and foreign investment in areas of high unemployment. Offer investment grants, tax breaks for firms who relocate. 3. Employment subsidies Government could give subsidies for businesses that take on the long-term unemployed. Employment subsidies may also be available for overseas firms locating in the UK in regions of below-average economic prosperity. The main weakness of relying too heavily on demand-management policies to reduce unemployment is that much unemployment is not cyclical; rather it is frictional and structural in origin and cannot be solved simply by injecting vast amounts of money into the circular flow of income and spending. There is a need to encourage new industries new enterprises producing new products for new markets therefore tax breaks on investment in new machinery, research and development, setting up new businesses ( advisory agencies such as Business Link) Summary: The government’s current labour market strategy is firstly to rely on monetary and fiscal policy to maintain a stable rate of economic growth as a pre-condition for high and stable rates of employment. Macroeconomic stability is regarded as essential for creating the right climate in which new jobs become available. Secondly, supply-side policies and in particular active labour market strategies such as New Deal and other welfare and education reforms are given a higher weighting in seeking to reduce structural aspects of the unemployment problem. |