Q. Examine the factors which might explain the UK’s low inflation and low unemployment of recent years (60)

The UK has experienced a fall in unemployment from 3 million in 1992 to under 1 million in 2007. Inflation has also remained very low. Since 1997, CPI inflation has remained close to the government's target of 2% +/-1

The first factor to explain the fall in unemployment is economic growth. The UK has experienced a long period of uninterrupted economic growth since 1992. Growth has averaged 2.6% which is close to the long run trend rate of growth. This economic growth creates increased output and therefore firms employ more workers; this means cyclical unemployment is very low. Economic growth is one of the most significant factors for low unemployment in the UK, this is because when the UK experienced a recession in 1992, unemployment increased to 3 million.

Economic growth often causes inflation, because as the economy approaches full capacity, prices start to rise. However, in the case of the UK this has not occurred. Inflation has remained low because economic growth has remained steady and sustainable. Growth has never been much higher than the long run trend rate (2.5%). Therefore, growth has been non inflationary. This steady rate of economic growth is a significant factor in maintaining low inflation, if the growth was too fast then inflation would occur.

Many give credit to the MPC for these relatively benign economic conditions. The MPC have independence in setting interest rates; when inflationary pressures increase they respond by raising interest rates. Therefore, this has helped to keep inflation low and growth positive. The MPC have also helped reduce inflationary expectations because people have confidence in them. This has increased their effectiveness.

However, aggregate demand cannot alone explain low unemployment and low inflation. The low inflation in a period of economic growth suggests there are supply side factors helping to maintain low inflation. For example, increased productivity in the economy is keeping costs low; new technologies such as the internet and micro computers are helping to reduce costs for many firms. It is difficult to quantify the effects of this on inflation. However, for many electrical goods we can see falling prices, therefore it is important for some goods.

Global factors are also important, low inflation is not just a UK phenomena. Low inflation has occured in most of the OECD economic countries. This is related to the competitive effects of globalisation and lower raw material prices. However, in the EU, the low inflation has not been matched by low unemployment. The EU has higher unemployment than the UK, this suggests that the UK has benefited from better supply side policies.

For example, it is argued that UK labour markets are relatively flexible. In recent years the power of trades unions has fallen and it is easier to hire and fire workers than in the EU. This helps to explain the lower natural rate of unemployment and low inflation in the UK. However, it is worth remembering that the UK still has a high minimum wage, and some labour market restrictions, therefore it is difficult to quantify the true effects of these supply side factors.

• Unemployment revision notes
• Reasons for unemployment amongst ethnic minorities
  

Labels: unemployment

Discuss Reasons why Unemployment is higher in Spain, France and Germany than the UK. (40)

The UK is not in Euro therefore, it retains an independent Monetary policy. It can change interest rates according to state of economy. When inflation is not a problem the MPC can reduce interest rates to stimulate demand. However, Germany and France have an interest rate set by the ECB. This interest rate is set for the whole EURO zone, but this may not be appropriate. If growth in Germany is low, interest rates may not be able to fall to stimulate AD. Therefore, Germany may experience higher demand deficient unemployment. However, in Europe countries are less sensitive to interest rate changes. Also, France and Germany have broken the growth and stability pact to borrow more and pursue an expansionary fiscal policy.

There is also higher structural unemployment in Europe. For example, it is said labour markets are more inflexible, e.g harder to hire and fire workers. therefore, this discourages firms from investing.

Another cause of unemployment could be powerful trades unions, causing wages to be pushed above the equilibrium and therefore causing real wage unemployment. However, the UK has quite a high Minimum wage, which potentially could cause real wage unemployment but doesn't seem to.

Unemployment benefits are more generous in Germany, increasing the incentive to stay on benefits and decreased incentive to work. The UK is very strict about giving benefits. Arguably, government statistics underestimate the real extent of unemployment. The ILO labour force survey is higher than the government's claimant count.

see also:

• Phillips curve and Unemployment in UK
• Reasons for fall in unemployment in UK
  

Labels: unemployment

Discuss the extent to which the pursuit of Full Employment may conflict with other objectives. (60)

Full employment means unemployment is very low. There may be some frictional unemployment but generally those looking for work are able to find it. It also means the economy is operating close to, or at Full capacity.

To attain full employment the government could seek to increased Aggregate Demand (AD). This increases Real GDP and reduces cyclical unemployment; however as the economy gets close to full capacity it may cause inflationary pressures; causing inflation to be above target. Furthermore expansionary fiscal policies will cause higher consumer spending and therefore a rise in imports; this causes a current account deficit. This is particularly a problem in the UK, where consumers have a high Marginal propensity to consume imports.

However, it is possible to attain full employment through different approaches. To reduce unemployment, Monetarists argue the government should implement supply side policies. For example, making labour markets more flexible, increasing incentives to work, better education and training e.t.c. These policies can reduce the natural rate of unemployment without causing inflation. In fact some supply side policies which increase productivity may actually help to reduce inflation. Also, if the policies are successful in increasing productivity it will increase the competitiveness of UK exports and therefore improve the balance of payments current account.


Any type of economic growth may conflict with environmental objectives. Causing pollution and contributing to global warming. Arguably environmental objectives are not a high priority for macro economic objective. But, the economic cost of global warming is rising all the time.

However, it is possible to have economic growth and minimise the environmental impact.

related essays:

• Explain reasons for fall in unemployment in the UK
• Discuss whether demand side policies will reduce unemployment
  

Labels: unemployment

When talking about policies to increase labour market flexibility is the new deal and education and training considered the same point and how easy it is for the uk to abolish the maximum working week legislation as it is part of the social chapter what evaluation could i use

The New Deal would count as a separate policy to education and training. The new Deal is more than just training. For example, it involves giving unemployed interview skills and at the end of 6 months participants can be made to take certain jobs and or training.
Everyone gets a new deal advisor to help with various aspects of getting a job

New Deal

Labels: unemployment

The UK is experiencing both low inflation and low unemployment. to what extent do these data contradict with phillips curve analysis? (40)

• In recent years unemployment in the UK has fallen from 3 million (1992) to under 1 million (2007)
• Inflation has fallen from 10% in 1992 and has remained close to the governments' inflation target of 2% +/- 1.

The phillips curve suggests there is a trade off between unemployment and inflation. This is because an increase in AD can cause higher output, and therefore, lower unemployment. As the economy gets close to full employment, inflationary pressures rise.

see: phillips curve

The UK experience suggests that a fall in both unemployment and inflation suggest this trade off no longer occurs. This is because phillips curve analysis suggests a fall in inflation should lead to higher unemployment.

However, there are other reasons to explain the fall in inflation and unemployment. For example, arguably there has been a fall in structural unemployment; a fall in the natural rate of unemployment. For example, better education and training, more flexible labour markets and more difficult to get government benefits.

see: natural rate of unemployment

Structural (underlying inflation) may have fallen for various reasons such as: improved technology, lower price of raw materials, increased labour productivity, the effects of globalisation and greater efficiency.

Therefore, there may be still a trade off between inflation and unemployment; however, this trade off is much better. The phillips curve has just shifted to the left.

However, monetarists dispute this, they argue there is no trade off at all in the long run. They believe the Phillips curve is perfectly inelastic. Monetarists believe economic growth.

Monetarist view of Phillips Curve

Labels: unemployment

Unemployment rates amongst different ethnic minorities tends to be higher.

For example, Unemployment statistics for 2001-02 UK Economy:

• White 4%
• Pakistani 16%
• Bangladeshi 22%
• Black Caribbean 12%
• Indian 7%
• Chinese 6%

Source: Official for National Statistics, Annual Local Area Labour Force Survey 28 March 2003

Why Unemployment rates are Higher for Certain Ethnic Minorities Groups


1. Language Skills.

In a service based economy English language speaking, is a high priority. Those workers who have English as a second language are at a disadvantage.

However, many ethnic minorities in the UK are second or third generation and speak English as their first language. Therefore, this argument only applies to first generation immigrants who are now in a minority.

It is also worth noting that unemployment levels tend to be much higher amongst young (first generation immigrants) For example, unemployment amongst Bangladeshi 16-24 year olds rises to 36% compared to 22% for all ages

2. Lower Educational qualifications.

Reports show that Black Carribean student have lower A Level grades and are less likely to go to university. However, educational standards vary significantly amongst ethnic minorities. For example, Chinese and Indian students quite often surpass white students.

E.G. The proportion of black and Pakistani pupils gaining five GCSEs at grades A to C was 29% in 1998.

The proportion of Bangladeshi pupils is 33% while the performance of Indian, Chinese and other Asian pupils continues to outstrip that of white pupils.

% of students gaining Five GCSEs at grades A to C

White Pupils 47%
Chinese Students 61%
Indian pupils 54%

Source for statistics: BBC

See also: Discrimination



3. Discrimination.

The effects of discrimination are hard to quantify. But, it could be a significant factor to explain higher unemployment. In practise racial discrimination is outlawed, but, in practice it can be difficult to enforce.
However, there appears to be a big divergence between Indian unemployment and Bangladeshi unemployment. This suggests education is more significant than discrimination.

Racial discrimination in the workplace

4. Geographical Factors.

Ethnic minorities often live in certain areas of the country and in parts of cities. Some of the areas in these inner city ghettos are associated with higher rates of unemployment. This can lead to a feeling of alienation and hopelessness. Discouraging young ethnic minorities from being able to entering the labour force.

• Unemployment Revision Notes
  
• Unemployment and Ethnic Minorities
• Ethnic Minorities Task Force
  

Labels: unemployment