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Economics Commentary Essay

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Sharp rise in unemployment as financial crisis hits jobs market

British unemployment today posted its biggest rise since the country’s last recession 17 years ago as the financial crisis filtered through to the jobs market.

Official figures showed unemployment measured by International Labour Organisation (ILO) standards rose by 164,000 in the three months to August from the previous quarter to stand at 1.79 million. The rise took the jobless rate up half a percentage point to 5.7%, also the biggest jump since July 1991.

“These numbers are truly horrendous and much worse than I had feared,” said David Blanchflower, a labour market expert and member of the Bank of England’s monetary policy committee.

He told guardian.co.uk his earlier prediction that unemployment would rise to 2 million by Christmas now looked conservative. “Unemployment will be above 2 million by Christmas. I am particularly worried at the 56,000 rise in the number of young unemployed people. These are school leavers who are unable to get a job or claim benefits, which is why the claimant count has not risen even faster than it has,” he said.

The number of Britons out of work and claiming jobless benefits rose by 31,800 last month to 939,000, the eighth monthly increase in a row, and August’s rise was revised higher to 35,700. The City had expected a 35,000 increase for September.

This so-called claimant count measure is always lower than the broader, internationally recognised ILO measure which includes people not claiming benefits, because some unemployed people are not entitled to claim benefits, or choose not to do so.

The rise took the claimant count jobless rate up to 2.9%, its highest level since January 2007.

The prime minister, Gordon Brown, responded to the figures this morning by pledging the government would do everything it could to create jobs in the UK economy, which is teetering on the brink of recession.

The government also announced today it was making an extra �100m available to retrain workers who lose their jobs.

The employment minister, Tony McNulty, said the jobs data painted a “bad picture” of the UK economy: “But the job is to look forward and see how we can deal with any dip in employment rather than talking about the causes.”

The number of employed people dropped 122,000 to 29.4million over the three-month period.

The FTSE 100 fell more than 3% this morning, wiping out all of yesterday’s gains. The mood darkened after the unemployment figures, and the index of leading shares fell more than 150 points to 4235.6.

The Liberal Democrats’ work and pensions spokeswoman, Jenny Willott, urged the government to turn its attention to unemployment and inflation, now the banking rescue package had beeen agreed.

“Real families across Britain are suffering, not just those working in the Square Mile. As the number of vacancies shrink, it will be harder and harder to get people back into work. It will not simply be a case of retraining the unemployed if there are no jobs for them to return to,” she said.

The number of job vacancies dropped by 62,000 from a year ago to 608,000 in the three months to September. And 147,000 people faced redundancy in the three months to August, up by 28,000.

For many people, a bleak Christmas lies ahead as the fallout from stockmarket turmoil spreads to the rest of the economy.

Brendan Barber, the general secretary of the TUC, said: “We are now seeing the effect of the credit crunch on the rest of the economy. I fear that the whole economy will soon feel the impact of the problems in the banking sector.”

He urged the Bank of England to cut interest rates again to avoid a severe recession.

Derek Simpson, the joint general secretary of the Unite union, said: “Government intervention should not just stop with the banks. Action across the wider economy is necessary to protect jobs and the economy in a recession.”

Alan Clarke, UK economist at BNP Paribas, said: “If you look at the claimant count number, it wasn’t as bad as expected, but if you look at the ILO, it was simply awful. These numbers are falling off a cliff.”

In a sign that consumer price inflation – now at a 16-year high of 5.2% – is not feeding into wages, annual average earnings growth slowed to 3.4% in the three months to August, its weakest in five years.

“As for pay pressures, the average earnings numbers remain very subdued,” said Philip Shaw, the chief economist at Investec. “The labour market appears yet again not to be an inflationary threat to the economy which helps to justify the cut in interest rates last week.”

Economists believe it is going to get worse. Thousands of jobs are being lost in the City, where banks have merged or collapsed, and on the high street, where growing numbers of retailers are going bust.

Manufacturers laid off 46,000 workers in the three months to August, taking the total number of manufacturing jobs to 2.87million, today’s figures from the Office for National Statistics showed.

Job losses are spread across the economy, with Cadbury announcing 580 job cuts this week and ITV cutting about 1,000 jobs. The Centre for Economics and Business Research estimates 62,000 financial jobs will be lost by the end of next year.

Nigel Meager, the director of the Institute for Employment Studies, said: “No part of the country is spared. Much attention has focused on high-end jobs in the City. In an economic downturn, however, the real human cost is likely to hit lower-skilled workers who find it harder to move into another job and have less of a financial cushion to see them through difficult times.

“As vacancies continue to evaporate, competition for any job available will become fierce and the existing long-term unemployed, as well as young people entering the labour market will be particularly disadvantaged.”


One of a government’s macroeconomic goals is low levels of unemployment. Another way of expressing this is to say that governments desire full employment in its economy. Unemployment exists within an economy when there are people who are registered as willing, capable and ready to work at the market clearing wage, but unfortunately do not hold any jobs.

The above article deals with the sudden fall in the employment rates occurring in Britain, affecting the stock market, the government expenditure, the redundant employees, and the Britain economy itself. This sharp rise in unemployment has been caused primarily due to the global credit-crunch.

Underemployment could also be occurring in the Britain economy since workers wanting full-time jobs would be able to find only part-time employment. This would thereby result in lower wages and lower output for each worker.

Demand-deficient or cyclical unemployment, which has taken place in Britain, has occurred due to a lack of sufficient goods and services being demanded, as well as a poorly operating labour market.

This Demand-deficient unemployment is illustrated in the figure below:

Herein, the causal factor resulting in disequilibrium unemployment is that labour markets are not working very smoothly. This is so because of the financial crisis, which resulted in companies aiming to execute cost-cutting measures, and thereby resulting in the labour resisting such wage cuts. Since workers are not passive commodities, the income wages will go up easily but will refrain from falling; this is because they are sticky downwards. In the above diagram, the demand for labour falls from ADL1 to ADL2 due to the fall in demand for goods and services. But as mentioned earlier, the workers’ real incomes do not fall to W2, so long as equilibrium is not attained. This therefore results in the disequilibrium unemployment of Q2- Q1.

Structural unemployment has also occurred in Britain as the structure of its economy has undergone a severe change. With the degree of unemployment being very serious, Britain is seeing a significant loss of jobs in the real estate, Information technology, and food industries. This is very bad for the economy since this situation can remain for another few months.

The Britain government may use the aid of a variety of strategies to reduce the unemployment. This government can provide some aid to the employers and also encourage trade in creating employment. Structural adjustment policies can also be designed to align labour skills with the needs of employers, such as retaining schemes and appropriate use of technology; Gordon Brown has already chosen this step by announcing �100m for retraining. Even policies designed to stimulate the levels of aggregate demand, such as the use of fiscal and monetary policies, will prove effective in mitigating the effects of this disaster.

But nevertheless, the British government will find the goal of full employment difficult to achieve. This would be to reasons such as the unavoidable occurrence of inflation when trying to reduce demand-deficient unemployment. The limitations of using Fiscal policies to raise the Aggregate demand would also hinder the act towards attaining full employment. Examples of these would be time-lags and the crowding out effect.

The short-term impacts of this situation would include reduction in the government expenditure, arising due to more money being provided as unemployment benefits and also due to less tax revenue being received by them. Another short-term effect would be the opportunity cost arising in terms of output foregone and the indisputable inefficiency.

The long-term impacts of this sudden unemployment include the individual and social costs born primarily by the unskilled and lowly-paid workers. These workers will certainly find it difficult to look for suitable jobs in the future. Even the impact on poverty and income distribution is enormous, due to a large majority of workers within the primary sector being made redundant. In Britain, for example, a majority of the real estate workers are being dismissed. Thus there has stemmed an unequal impact of unemployment in terms of region, urban/rural, gender, race and age. This could be particularly hazardous for in determining the racial distribution of Britain.

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