Impact of Unemployment on Business

Businesses are affected in a variety of ways depending on whether unemployment is high or low, and rising or falling.

Some business implications of rising / high unemployment include:

• Lower consumer spending = lower demand for income-elastic products
• Demand for inferior goods (lower price, quality) may increase
• Greater supply of labour – potentially lower wage/salary levels
• Unemployment creates insecurity in the workforce; potentially a cause of lower morale and de-motivation
• Danger of lost skills for industries as a whole
• Business may be impacted by social problems associated with high unemployment (e.g. rising crime)
• Recruitment (in theory) becomes easier – there should be more applicants for each vacancy
• Lower staff turnover – employees less likely to be able to find other jobs, or want to move in an uncertain economic climate

Some business implications of falling / low unemployment:
• Consumers have more income = higher demand for income elastic goods
• Labour market “tightens” – increased upward pressure on wages / salaries
• Harder to recruit or expand without offering better worker packages – potentially affects ability to increase capacity
• Greater sense of job security and motivation in the workforce if the business is doing well

The appropriate response to changes in unemployment will depend on several factors, including:
• The nature / cause of unemployment (e.g. cyclical, structural, seasonal)
• The labour-intensity of the business
• The ability of the business to respond (resources, management structure etc)

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Evaluation of Unemployment Policies

At A2 level the focus of study on unemployment switches more to the consequences of unemployment and economic inactivity. For example you need to understand and discuss the consequences for individuals and the performance of the economy

Consequences may include:

(i) Effects on the underlying trend growth rate
(ii) Impact on government finance and the budget deficit
(iii) Implications for relative poverty / inequality
(iv) Direct effects on demand and associated multiplier and accelerator effects
(v) Longer term impact on the skills / motivation / employability of the unemployed
(vi) Social implications

There is also a need to be aware of the determinants of the natural rate of unemployment and both the short-run and long-run Phillips curves, and to be able to discuss the implications of these for economic policy.

So crucial to your revision will be

1/ The dynamics of the natural rate (i.e. frictional + structural) and the most effective policies to bring down both types of unemployment
2/ Discussions about the efficacy of different demand-side approaches to limiting cyclical unemployment in a recession
3/ The basics of the original Phillips Curves and criticisms / variants of it including the importance of inflation expectations, money illusion and the NAIRU
4/ Understanding the factors that explain why there are persistent differences in unemployment rates between countries - not least within the 27 nations of the European Union
5/ Consideration of labour market flexibility and how it can impact on macroeconomic performance
6/ Long term unemployment / youth unemployment and other deeper policy dilemma

Evaluation on unemployment policies

1. Unemployment policies are designed to
a. Improve skills / human capital of the workforce so that people can be flexible as the economy changes over time
b. Provide the right incentives to look for and accept work
c. Increase the occupational and geographical mobility of labour
d. Maintain a sufficiently high level of demand for goods and services to create new jobs
e. Encourage entrepreneurship and innovation as a way of creating new products and market demand which will generate new employment opportunities
2. There are always cyclical fluctuations in employment. If growth can be sustained and monetary and fiscal policy can avoid a large negative output gap then it should be possible to create a steady flow of new jobs. 
3. An economic recovery creates new jobs, the issue is whether people in the labour market have the right skills, qualifications and experience to take them
4. Demand and supply-side policies need to work in tandem for unemployment to fall. Simply boosting demand if the root cause of unemployment is structural is an ineffective way of tackling the problem. If demand is stimulated too much, the main risk is rising inflation
5. Full-employment does not mean zero unemployment! There will always be some frictional unemployment – it may be useful to have a small surplus pool of labour available. Most economists argue that in a modern economy there will always be some frictional unemployment of perhaps 2-3% of the labour force.
6. There are still large regional differences in unemployment levels which causes significant economic and external costs. Urban and regional regeneration can take decades to achieve.

Economists agree that unemployment cannot fall to zero since there will always be frictional unemployment caused by people moving into the labour market and others switching between jobs. Full-employment might be defined as when the labour market has reached a state of equilibrium - i.e. when those who are willing and able to work at going wage rates are able to find work.

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Supply side factors affecting Employment

Supply-side factors include:

1/ Incentives to search for and then accept paid work (frictional U)
2/ Skills of the labour force (human capital)  (structural U)
3/ Impact of changes in geographical mobility of labour (structural U)
4/ Impact of changes in net migration of workers into the economy 
5/ Importance of the availability and cost of child care as a factor affecting the ability of parents to seek and find work
6/ Changes in state retirement ages and investment in further and higher education

*Students should be able to analyse and evaluate these determinants with the help of production possibility curves and AD/AS diagrams. 
*Students should also understand the terms cyclical, frictional, seasonal and structural unemployment.
*There should be an understanding of the output gap in relation to economic growth, unemployment and the price level

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Demand side factors affecting employment

Demand side factors include:

1/ Strength / weakness of aggregate demand in the economic cycle i.e. changes in C+I+G+X-M - e.g. effect on jobs of a fall in UK exports overseas
2/ Cost of employing workers including real wages, employers’ national insurance contributions - many economists now calling for a cut in NIC as a way of stimulating jobs
3/ Impact of changes in the exchange rate and growth in trading partner countries on demand for and output in our export industries
4/ How changes in government spending and taxation can change the incentive for businesses to employ more/less people - impact of fiscal austerity / sharp decline in public sector jobs
5/ Impact of foreign direct investment on the demand for labour in the UK economy
6/ Employment effects from policies designed to stimulate enterprise (long run employment creation effects)

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How to reduce Unemployment

Causes Unemployment

A look at the main causes of unemployment – including: demand deficient, structural, frictional and real wage unemployment.

Main types of unemployment

1. Frictional unemployment

This is unemployment caused by the time people take to move between jobs, e.g. graduates or people changing jobs. There will always be some frictional unemployment in an economy because information isn’t perfect and it takes time to find work.

• Frictional unemployment

2. Structural unemployment

This occurs due to a mismatch of skills in the labour market it can be caused by:

• Occupational immobilities. This refers to the difficulties in learning new skills applicable to a new industry, and technological change, e.g. an unemployed farmer may struggle to find work in high tech industries.
• Geographical immobilities. This refers to the difficulty in moving regions to get a job, e.g. there may be jobs in London, but it could be difficult to find suitable accommodation or schooling for their children.
• Technological change. If there is the development of labour saving technology in some industries, then there will be a fall in demand for labour.
• Structural change in the economy. The decline of the coal mines due to a lack of competitiveness meant that many coal miners were unemployed, however they found it difficult to get jobs in new industries such as computers.

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Policies to reduce unemployment

Distinction can be made between demand-side and supply-side policies to improve the working of the labour market in matching people to available jobs

Reducing occupational immobility: Immobility is a cause structural unemployment.

Policies such as apprenticeship schemes aim to provide the unemployed with the new skills they need to find fresh employment and to improve the incentives to find work. In 2013, over 500,000 people started apprenticeships in the UK.

For many years the poor quality of work-place training has been a concern, with evidence of a persistent skills-gap in the UK. In a report published in 2011, a trade union reported that 11% of British adults do not have any qualifications.In some areas such as parts of Glasgow and Birmingham, more than a third of people of working age have no qualifications.

Reducing the geographical immobility of labour: Many people have the right skills to find fresh work but factors such as high house prices and housing rents, family and social ties and regional differences in the cost of living make it difficult and sometimes impossible to change location in order to get a new job. Many economists point to a persistently low level of new house-building as a major factor impeding labour mobility and the chances finding new work.

Benefit and tax reforms: To some economists, a policy that reduces the real value of welfare benefits might increase the incentive for the unemployed to take a job. But it is rare that the root cause of someone staying out of work is the prospect of out of work welfare handouts. Targeted measures to improve people's incentives might include linking welfare benefits to participation in work experience programmes or lower marginal tax rates for people on low incomes.

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Structural Unemployment

There are seven causes of unemployment. Four cause frictional unemployment. That occurs whenever employees leave their job to find a better one. There are two causes of structural unemployment. That's when workers' skills, or income requirements, no longer match the jobs available.  These occur even in a healthy economy. The natural rate of unemployment is between 4.7 percent and 5.8 percent according to the Federal Reserve.

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Cyclical Unemployment

Causes of Unemployment

• Rapid changes in technology
• Recessions
• Inflation
• Disability
• Undulating business cycles
• Changes in tastes as well as alterations in the climatic conditions. This may in turn lead to decline in demand for certain services as well as products.
• Attitude towards employers
• Willingness to work
• Perception of employees
• Employee values
• Discriminating factors in the place of work (may include discrimination on the basis of age, class, ethnicity, color and race).
• Ability to look for employment

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Types of Unemployment

Types of unemployment

There are several types of unemployment, each one defined in terms of cause and severity.

Cyclical unemployment

Cyclical unemployment exists when individuals lose their jobs as a result of a downturn in aggregate demand (AD). If the decline in aggregate demand is persistent, and the unemployment long-term, it is called either demand deficient, general, or Keynesianunemployment. For example, unemployment levels of 3 million were reached in the UK in the last two recessions, between 1980 and 1982, and between 1990 and 1992. In the most recent recession of 2008-2010, unemployment levels rose to 2.4m in the last quarter of 2009, and are likely to peak at over 2.5m during 2010.

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Employment

The Labour Force Survey (LFS) defines an employed person as anyone aged 16, or over, who has completed at least one hour of work in the period being measured, or are temporarily away from his or her job, such as being on holiday. The number of people in employment is not the same as the number of jobs given that some people have more than one job.

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Underemployment

Underemployment is defined as a situation where people are working fewer hours than they wish; e.g. you would like to work 40 hours a week, but the firm only gives you 30 hours. (Underemployment may also refer to the fact workers accept jobs that don’t utilise their skills. e.g. graduate working in McDonalds may be considered to be ‘under-employed’)

According to the Office for National Statistics, there are 2.8 million workers in Britain who are working less hours than they would like (link). This could include people forced to work part time rather than full time. This figure of underemployment has increased during the recession because firms have sought to avoid paying redundancy by reducing working hours and therefore cost of labour.

Underemployment does not have as many costs as official unemployment. But, it does mean the underemployed have lower incomes and so will spend less. Also, under-employment needs to be considered when evaluation the output gap in the labour market and output gap of the economy.

Under-employment in the great recession

A surprising feature of the current recession is the fact unemployment is relatively lower than we might expect. (see: UK unemployment mystery)

Part of the explanation is due to the issue of underemployment.  This rise in underemployment may be due to:

• Low real wages, therefore workers need more hours to make up for low take-home pay.
• Firms cutting hours in order to cut costs and stay in business.
• Underemployment might be seen as an alternative to making workers redundant. It saves the firm having the costs of firing and later rehiring workers.
• Under-employment may indicate a more flexible labour market with firms able to change worker hours and not be tied by fixed contracts. In one sense workers benefit as unemployment is lower, but it also contributes to declining real wages.

This under-employment is an important indicator because it suggests spare capacity in the labour market and needs to be considered when examining the state of the labour market. For example, if demand in the economy increased, firms could increase hours of the under-employed to increase output, and not have to increase wages.

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Universal credit pushing people into debt

Thousands of benefit claimants are facing debt, rent arrears and eviction as a result of policy design flaws in universal credit, according to landlords and politicians, who are demanding an overhaul of the system.

They have warned that UC rules that require claimants to wait at least six weeks for a first benefit payment mean many are going without basic living essentials, forcing them to turn to food banks and loan sharks.

Ministers are being urged to slow down the national rollout and to increase support for vulnerable claimants who are struggling to cope with the demands of monthly payments and an increasingly online-only system.

The findings have emerged during an investigation by the Guardian, which has also revealed that:

• Eight out of 10 social housing tenants moved on to UC are falling into rent arrears or increasing the level of pre-existing arrears.
• Families unable to manage the regulation 42-day wait for a first payment are regularly referred to food banks by housing associations or local MPs.
• Some claimants are waiting as long as 60 days for an initial payment because of processing delays on top of the formal wait.
• Uncertainty about the system has contributed to a dramatic decline in the number of private landlords willing to take on benefit recipients, even if they are in work.

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Costs of unemployment

You may end up homeless...

Living on the street....




Begging for money.....

You could end up old....and alone....

Eric (and Betty) from Robby Richmond on Vimeo.

Universal Credit

The government are rolling out a host of changes to the benefit system centred on a Universal Credit that incorporates a host of existing benefits. Here's how the plans could affect your finances.

What is changing?

The main aim of Universal Credit is to simplify the welfare system by replacing a number of different state benefits with a single payment.

The payments that are being stopped and replaced by Universal Credit are:

• Income Support
• Income Related Jobseeker's Allowance
• Income Related Employment Support Allowance
• Housing Benefit
• Working Tax Credit
• Child Tax Credit

What benefits can the unemployed claim?

Use an independent benefits calculator to find out:

• what benefits you could get
• how to claim
• how your benefits will be affected if you start work

These are free to use, anonymous, and have replaced the Benefits Adviser service.

Calculators

Use one of the following:

• Turn2us - for information on income-related benefits, tax credits, Council Tax Reduction, Carer’s Allowance, Universal Credit and how your benefits will be affected if you start work or change your working hours
• entitledto - for information on income-related benefits, tax credits, contribution-based benefits, Council Tax Reduction, Carer’s Allowance, Universal Credit and how your benefits will be affected if you start work

CLICK THIS LINK

Economic costs of unemployment

The economic and social costs of unemployment include personal costs (lost income), costs to government (lost tax revenue) and costs to society in general (social problems, lost GDP.

• Loss of earnings to the unemployed. Unemployment is the biggest causes of poverty in the UK
• Potential homelessness. Loss of income  can leave people without sufficient income to meet housing costs. Rises in unemployment often exacerbate the rates of homelessness. (BBC)

• Those who are unemployed will find it more difficult to get work in the future (this is known as the hysteresis effect)

• Stress and health problems of being unemployed. Amongst studies of unemployed men, signs of depression, mental anxiety and health problems are noticeably higher. (Effects of unemployment on health (US Library of Health)

• Increased government borrowing. Higher unemployment will cause a fall in tax revenue because there is less people paying income tax and also spending less (hence lower VAT). Also the government will have to spend more on unemployment and related benefits. The government doesn’t just pay unemployment benefit, but a family who has unemployment will be more likely to receive housing benefit and income support. One study shows that the cost to the exchequer for one person being unemployed is £6,243 a year in benefits and lost tax revenue. (Independent)

• Lower GDP for the economy. High unemployment indicates the economy is operating below full capacity and is inefficient. This will lead to lower output and incomes.
• Increase in social problems. Areas of high unemployment (especially youth unemployment) tend to have more crime and vandalism. It can lead to alienation and difficulties in integrating young unemployed people into society.

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The financial costs of unemployment

The economic and social costs of unemployment include personal costs (lost income), costs to government (lost tax revenue) and costs to society in general (social problems, lost GDP. Lower GDP for the economy. High unemployment indicates the economy is operating below full capacity and is inefficient

Sustained unemployment imposes significant economic, personal and social costs that include:

• loss of current output;
• social exclusion and the loss of freedom;
• skill loss;
• psychological harm, including increased suicide rate (which I will return to later);
• ill health and reduced life expectancy;
• loss of motivation;
• the undermining of human relations and family life;
• racial and gender inequality; and
• loss of social values and responsibility.

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Impact of job loss - how can you lighten the blow?

QUESTION: Impact of job loss - How can I lighten the blow? 

ANSWER: 

The impact of job loss is tremendous. The loss of a job is never easy, even if it is expected. Unexpected job loss has an even greater emotional impact on us. 

For a man, the loss of a job can be devastating to his identity, his sense of self worth, and his self respect. If his income is the primary income, a job loss may cause his wife to react negatively out of fear due to a loss of security. She may blame him for something that may not be his fault. His already bruised and deflated ego, his sense of pride, and his most important emotional need -- respect, will suffer. Her reactions to him will define their future relationship for a long time to come. 

For a woman, the loss of her job undermines her greatest emotional need -- security. If she is the primary earner, her security is now threatened and negative thoughts of losing the house or insurmountable financial burdens will lead to stress. Often, a woman forms close personal relationships with her co-workers. A sudden job loss may feel like an unexpected loss of a loved one, because the emotional support from her co-workers is severed or strained. 

For both men and women, job loss will reflect on our personal value. It may be argued that we put too much value on the external image of a job and not enough on the internal dignity of being a human being. Yet, it is hard to see or feel dignity when your source of income is removed. There is no simple solution, a job loss WILL cause stress. Many researchers rank the stress of job loss with Post Traumatic Stress (PTS) found in combat. 

Here are some tips on handling the job loss stress and action items that will help you on the road to a new and better job:

• Recognize the pain. The trauma and shock are real. Identify those emotions and do not deny them. It is appropriate to mourn, but job loss not an excuse to stop living. You are worth much more than just a job.
  
• Take inventory. Begin to take action by taking inventory of yourself and your situation. Ask a friend or family member whom you trust to help you with this exercise. You may get some pretty good insight.
  
  
  • Make a list of your qualities; being specific about the skills that you have. During interviews, you will be asked to discuss them, so be prepared now!
  • Where have you grown?
  • What have you done that made an impact? Be specific and use numbers whenever possible (job interviewers love numbers).
  • List your skills specifically. Do this on a multiple basis, squeezing out every ounce of skill that you have.
• Record Deficiencies. Make a list of your deficiencies because you may be asked to discuss them as well. If this job loss occurred due to some deficiencies, you must be prepared to talk this through with a potential employer; be frank, honest - yet resourceful. Be careful not blame your previous employer, because you will be in a situation where the potential employer is looking for a new loyal employee. Be loyal to your former company and sing its praises (as best you can). Tell where you fit in and why. Tell how the company helped you grow.
  
• Tell the truth. If the company needed to cut costs and you were unexpectedly laid off, realize that there is no longer a stigma to being "downsized" in America. You are not alone, even though it feels like it right now. It has happened to millions of people in almost every industry. The ripple effects of one industry can move rapidly through another, causing companies short-term financial stress, where the only cost savings is through layoffs. If there is any internal or external reason for your job loss, simply be prepared to talk about it. Hiding it is not only unethical, if it surfaces later. it may do you more harm.
  
• Do not become negative. Negativity will not help you in future interviews. Begin to talk about your former position and the people there in only positives terms. Consider that losing your job is best thing that ever happened to you and that this job loss WILL lead to bigger and better things. There are many people who will tell you that the loss of their job was the best thing that ever happened to them. They had other interests, dreams, goals, and ambitions that they never would have pursued while at their old job. Now is the time to seize the moment.
  
• Write it down. Journal your feelings, emotions, thoughts, and prayers. Write down what it is that you want to become. Create your perfect job on paper and then go LOOK for it! Take a risk and apply for your dream job. You just might get it. Research has shown that those people who write out their emotions every day after losing a job, find a job sooner. It may be that they worked out everything they wanted to say to their former boss and are now prepared to move on. Getting it out of your head and onto paper is a profitable thing.
  
• Examine Yourself. Examine elements of your life:
• Emotional and spiritual health. This is a perfect time to take spiritual inventory and re-examine the meaning of life. There are many spiritual communities that have job loss groups you can join at no cost. You are a human being with dignity and you are worthy of respect. You are not to be pitied. Do not drag yourself down with negative thoughts - they will show through in your voice and facial expressions and your writing. (Depression is a natural reaction to stress: Have someone else read your cover letters, e-mails, and resumes since there is a tendency to have a negative tone creep in regarding your previous employment).
• Health and nutrition. Eat right, exercise, go to bed on time, wake up as if you were still working and make getting a new job your temporary job. Avoid excess eating or drinking. Stress can lead to depression, so be on the lookout for signs of unhealthy behavior.
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