Executive summary

Introduction
Current Unemployment status in UK
The unemployment rate in UK in June 2013 was 7.7 percent among the economically active
population which is 0.1 percent lower from march 2013 and 0.2 percent lower from the year
2012.Moreover, there were 2.49 million unemployed people at the age of 16-64 of whom 1.42
million was male and 1.07 million was female in united kingdom in June 2013 which is 18000
lower from march in the same year and 40000 lower from earlier year. However, the inactivity
rate of the age from 16 to 64 was 22.2 percent which is 0.2 percent lower than that in March of
the respective year and 0.3 percent lower than that in previous year. The total number of
economically inactive people aged from 16-64 was 8.95 million which is lowered by 83
thousands from March in the same year and is also lower than 88 thousands from previous year.
Chart: Unemployment rate (aged 16+)

Source: Labour Force Survey - Office for National Statistics






Chart: Unemployment by duration for June to August 2013

Source: Labor Force Survey - Office for National Statistics

On the other hand, in case of international comparison, the unemployment rate in European
Union (EU) 10.9 percent of the economically active population in august 2013.however, the
highest unemployment rate in EU countries is 27.9 percent in Greece and 26.2 percent in Spain.
The lowest unemployment rate in EU countries is 4.9 percent in Austria. Moreover,
unemployment rate in Japan was 4.1 percent in august 2013 where the rate in United States was
7.3 percent in the same duration.

However, the employment in UK from the beginning of 2008 to early 2010 reduced by 80
thousands because of economic (Mimeo, 2010) recession. This was not a large decline because at
the time of recession in 1980, employment decline by 1.8 million. In addition, the male loss their
job more than female where male employment reduced by 3 percent and female employment was
declined by only 0.7 percent at the time of recession. Though young are 19.5 percent of the
working population in united kingdom, they have to suffer discriminately. Among the
employment deduction in 2008 and 2010, 74 percent was between the age from 16 to 24.there
was also gender biasness in job losses where 44 percent were male and 30 percent was female
among the job loser. Furthermore, unemployment rate of young people is also high with 35.6
percent for 16-17 years old as well as 17.1 percent for 18-24 years old. There is also a declining
trend in employment to population rate of the young. Moreover, unemployment rate for young is
higher than adults whereas the ratio of unemployment rate of young and adults is 2.53.the reason
behind the increase in unemployment rate is decline in demand for labor as product demand is
declining.

Economic Growth and Unemployment:
It is widely accepted that there is a negative relationship between economic growth rates and the
unemployment rate (Mitra, 2007). In the short term, there is no such strong connection between
economic growth and an employment rate. It is very usual for unemployment rate to show a
declining trend, if the overall activities of economy have shown a positive turned. For this
reason, this is known as lagging economic indicator. It can be explained further by an example.
Unemployment may not decrease at the same time when a recession ends. It may happen because
some firms may have underutilized human resource on their payroll. It is because of laying-off
workers when demand decreases and again hiring them again when the demand of products and
services increases (Farsio and Quade, 2003). If employer keeps the extra employee during
downtrend of economy, he can raise the production level at the very beginning of recovery stage
of economic cycle without hiring additional employee. He can respond the increasing demand by
raising productivity level. This le will push up the productivity level temporarily. Here a table
showing the trend of economic growth rate and unemployment rate is give.
Year Growth Rate (%) Unemployment Rate
2002 2.3 5.199
2003 2.82 5.048
2004 2.89 4.788
2005 2.34 4.799
2006 2.94 5.406
2007 2.72 5.4
2008 -0.14 5.558
2009 -4.96 7.458
2010 1.7 7.858
2011 1.1
7.7
2012 0.3
8
2013 1.9
7.2
Source: BBC: Economic Tracker: 2014
This data reveal the relationship between economic growths and unemployment. If we look at
the growth and unemployment rate in 2009, it is seen that the unemployment rate is the highest
and the growth rate is the lowest among the years presented here. The relationship between this
two factors are analyzed further bellow
Output will not grow faster than the rate of productivity growth until the employer begins
adding workers, after the labor on hand is fully utilized. By the combined rate of growth in labor
supply and labor productivity output can be measured, as the economy expand is progression.
The unemployment rate will decline, as long as growth in real gross domestic product is more
than the growth in labour productivity. Employment condition will improves, if the employment
growth is more than that of labor force. The long run relationship these two economic variables
can be described best by the Law of Okun. The Low of Okun is propounded by Arthur
Okun. This theory propounds that the potential output rate which is equal to the real GDP
growth, is necessary to maintain a stable unemployment rate. So it is recognized that the rate of
potential output rate is the key point to maintain the relationship between changes in the rate of
GDP growth and unemployment rate. If the unemployment rate is high as it is now in UK, the
real GDP has some shortage of potential GDP and this is known as output gap. As there is no
productivity growth, labor supply growth rate will be equal to the growth in output, as long as
there is an addition to the labor force. There will be shortage of employment opportunities, if the
labor force growth rate is larger than the GDP growth rate (Tatom). As a consequence, the
proportion of number of people with employment will fall. In the presence of productivity
growth rate, if the GDP growth is equal to labor supply growth rate, it will create job opportunity
for more people. This is because of rising demand which will motivate the employer to employ
more people. The policymakers are trying heart and soul to cut off the unemployment rate by
providing stimulus policies. Bu it is true that to bring down the unemployment rate, it is
necessary to maintain a output growth.
Inflation Rate and Unemployment:
Inflation is a bane for an economy and at the same time employment is boon for an economy.
But the true fact is that there is a negative relationship between these two variables of an
economy (Phillips, 1958). If the policy makers want to cut off the unemployment rate, there must
be a high inflation rate. But this notion is applicable for short term. So there must be a trade-off
between inflation and unemployment rate. If the goal is to maintain a low unemployment rate,
the economy is required bear a high inflation rate. On the other hand, if the purpose is to
maintain a low inflation rate, there may be a high unemployment rate (Tobin, 1972). It is mater
of hope that a reasonable rate for both for this variables achievable. The relationship between
inflation and variables in the context of UKs economy can be illustrated with the help of
Philips Curve.
Philips Curve: Philips curve describes the relationship inflation and unemployment.
Phillips showed that unemployment and inflation shared an inverse relationship inflation rose as
unemployment fell, and inflation fell as unemployment rose. To create employment opportunity,
the government is following stimulus policies. Due to these stimulus policies, more employment
opportunities are created which raise the demand of labour. It creates more demand for products
which raise the level of employment further. So the people have money in hand to spend, which
creates demand for product and thus raise the level of price ultimately. This is the mechanism
how more employment creates more inflation.
The Philipss curve has been created with data of the economy of UK for the years 2002-
2013.
Year Inflation
Rate (%)
Unemployment
Rate
2002 1.3
5.199
2003 1.4
5.048
2004 1.3
4.788
2005 2.1
4.799
2006 2.3
5.406
2007 2.3
5.4
2008 3.6
5.558
2009 2.1
7.458
2010 3.29
7.858
2011 4.48 7.7
2012 2.83 8
2013 2.5 7.2
Source: International Monetary Fund - 2013
World Economic Outlook


Source: Author
Here we see some discrepancy of theory propounded by Philips. We see in 2011 unemployment
rate and inflation rates both are high. Again in 2012, while the unemployment rate is high but the
inflation rate is high. This is not always true that inflation and unemployment are inversely
related. If the policy maker can come up with a number tools to control inflation while curving
the unemployment rate, it is possible to achieve low inflation rate and low unemployment rate.
For example, if the production can be raised along with the raising the income level of the, it can
be possible to curve the inflation rate.
Impact of Technology on Unemployment:
The technological advancement may affect the unemployment negatively for very short
term. Technology both eliminates jobs and creates jobs (Nordhaus, 2007). Generally it destroys
lower wage, lower productivity jobs, while it creates jobs that are more productive, high-skill
and better paid. Historically, the income-generating effects of new technologies have proved
more powerful than the labour-displacing effects: technological progress has been accompanied
not only by higher output and productivity, but also by higher overall employment (OECD,
1994). Almost all types of technological development create new demand for labor in some labor
markets and reduce the demand for labor in other labor markets (Mokyr, 1990). For example,
there is a substantial increase in labor productivity because of the introduction of assembly line
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2000 2002 2004 2006 2008 2010 2012 2014
Infaltion Unemployment
production methods and the production of interchangeable parts resulted in production. This sort
of technological innovation also creates demand for unskilled workers and at the same time
decrease in the demand for skilled artisans. On the contrary, the introduction of automation in
manufacturing processes reduces the demand for unskilled workers and has created demand for
quality control technicians and computer programmers. Usually, the mix of the demand for labor
will be changed by technological change, raising the demand for some types of labor and
reducing the demand for other types of labor (Mantoux, 2006). The people who will lose jobs as
a consequence of technological change that reduces the demand for that particular category of
labor are known as structurally unemployed. So it appears that technological change may affect
the demand for labor negatively in a particular labor market but the aggregate effect of
technology on unemployment is positive. It can be cleared with an example from UK labor
history. For example, in 1800, the majority of British workers were employed in agriculture.
Labour saving technology meant that food could be produced with fewer workers and so some
agricultural laborers lost their jobs as farms used more machines. However, as jobs were lost in
agriculture, new jobs were created in producing machines. Still technological change can raise
the unemployment level, if the labor market is inflexible. It means the labor force has only one
skill and they are stick to this.
Consequence of unemployment
Unemployment may lead to psychological disorder, social crime as well as economic downturn.
However, there are other consequences of unemployment those are mention below:
During the period of unemployment, the skills and ability of the workers reduces that
leads to the loss of human capital and ultimately to the loss of economic output.
A group of economists believe that unemployment leads to stressful life which makes an
unemployed man unhappy (Winkelmann and Winkelmann, 1998; Clark and Oswald,
1994; Frey and Stutzer, 2002; Ahn et al., 2004).
Another team of economic analysts mentioned that unemployment leads to malnutrition,
illness, mental stress and loss of self esteem and hence ultimately to depression (Linn et
al., 1985; Frese and Mohr, 1987; Jackson and Warr, 1987; Banks and Jackson, 1982;
Darity and Goldsmith, 1996; Goldsmith et al., 1996; Brenner and Mooney, 1983).
Goldsmith et al. (1996, 1997) found out that joblessness destroy self esteem and creates a
feelings of externality and helplessness among the youths. In addition, they also found
that based on the empirical evidence that joblessness leads to psychological disorders.
Te most important thing is that a group of socio-economists (Platt, 1984; Pritchard, 1992;
Blakeley et al., 2003; Hamermesh and Soss, 1974; Daly et al. 2008) found that there if
positive relationship between the rate of unemployment and the rate of suicide. That
indicates, suicide rate rises with the increase in unemployment rate. Moreover, a long
unemployed person has higher propensity to commit suicide.
(Brenner and Mooney, 1983; Moser et al., 1987, 1990) mentioned that unemployment
may also cause to decline in life expectancy of workers.
Moreover, the probability of poor physical health and complex disease like heart attacks
increases with the level of unemployment reported by Beale and Nethercott, 1987;
Iverson and Sabroe 1988; Mattiasson et al., 1990.
However, the effect of unemployment depends on the duration of joblessness of person.
The longer the period of joblessness, the greater the impact of unemployment. Long term
unemployment leads to peoples moral sinks (Layard, 1986,).
Ellwood, (1982) told that being unemployed for long duration especially at the age of
youth leads to permanent scars.
An empirical research shows that there is positive relationship between unemployment
rate and crime rate especially property crime. Thornberry and Christensen (1984) found
that engagement in crime decrease employment prospects that ultimately increase the
probability of involvement in crime. Fougere et al. (2006) mentioned that burglaries,
thefts and drug offences increase with the rise in unemployment rate of young. However,
Hansen and Machin (2002) mentioned that there is substantially negative relationship
between the number of crime reported by police for property and vehicles crime and the
proportion of worker payment beyond the minimum.
Carmichael and Ward (2001) mentioned that there is significant positive relationship
between burglary, theft, fraud and forgery and total crime rates and young and adult
unemployment. However the relationship between each category of crime and youth
unemployment is stronger. Carmichael and Ward (2000) also found that burglary rates
and male unemployment regardless of age are positively correlated.
Finally, there is positive relationship between unemployment rate and happiness of
everybody in the society (Di Tella et al., 2001, 2003; Blanchflower, 2007; Knabe and
Rtzel, 2008).In addition; rise in aggregate unemployment rate reduces national well-
being.
Conclusions:
Unemployment is one of the key variables. Demand for a product and thus investment is
directly related. Again the level of employment or unemployment is also affected by several as
explained previously. The conclusions that can be drawn from the previous discussion that some
variable have direct effect on unemployment in short and long terms. Some others have indirect
effect on unemployment. The growth rate has a direct bearing on unemployment. If the growth
rate is high, it will generate more economic activities and thus creates more employment
opportunities. The effect of technology on unemployment is positive. It offsets the
unemployment; it creates by increasing the demand of labor in any other sector.

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