STATE UNIVERSITY HIGHER SCHOOL OF ECONOMICS

School of World Economy and International Affairs

Foreign Languages Department

UNEMPLOYMENT ON THE LABOR MARKET OF GREAT

BRITAIN

Petushenkova Maria

Group 464 (2)

Academic Advisors

Prof. Tarev B.V., PhD

Prof. Khesin E.S., PhD
MOSCOW 2010

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 Contents

Introduction...........................................................................................................4

Current labor market tendencies and unemployment level in Great Britain.........6

1.1. Macroeconomic analysis................................................................................6

Unemployment classification by gender and qualification...................................7

2. Government regulation of the labor market......................................................9

2.1. The role of the International Labor Organization in the labor market

regulation.............................................................................................................11

Conclusion...........................................................................................................12

References...........................................................................................................14

Appendix.............................................................................................................15

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 Introduction.

Labor force in the modern market economy constitutes the key factor of

economic growth and development that provides stable and sustainable market

equilibrium in the long-term prospects. It is impossible to analyze the economic

system operation without taking into consideration the impact of labor market

development. At the same time labor market is represented by labor force

demand and supply can be considered as one of the most sophisticated elements

of the modern economic system which implies increasing interconnectedness

and interdependence of social and economic relations between employers and

employees as well as between market participants and government authorities.

The subject of this paper is defined as labor market and central to this

review is the current situation on the labor market of Great Britain. The topic

focuses on the problems of unemployment on the UK labor market including an

explanation of this economic phenomenon and investigation of its origin and

possible consequences. It can be undoubtedly claimed that one of the major

challenges that any industrialized country faces is to ensure that its labor market

operates so as to enable people who want to work to do so at a reasonable rate of

pay, i.e. to prevent unemployment and this assumption is regarded to be the

thesis of this paper. Great Britain being one of the most developed countries

concerning economic and social advancement is certainly not an exception.

Among other tasks of this paper is to examine the role of the British government

in tackling challenges connected with inefficient operation of the labor market in

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Great Britain. These challenges lead to long-term unemployment and as a

consequence to unhealthy and unfavorable market conditions.

Moreover, another task of this paper is to document the influence of the

global financial crisis on the development of the labor market in Great Britain

and to provide examples of government regulation of the labor market including

cooperation with the International Labor Organization. Subsequently, this paper

also demonstrates the role of this organization in the modern economy,

particularly under the current situation of crisis.

Consequently, the key purpose of this research is identified as the analysis

of the British labor market during the current economic situation. The

significance of this paper can be described through the fact that it is particularly

important to take into consideration the impact of the labor market to provide

the most efficient analysis of the economic system as it was mentioned above.

The topicality implies the importance of such analysis during the global

economic crisis.

This paper is mainly based on scientific papers devoted to the UK labor

market written both by British analysts and economists from other countries,

which forms a solid previous research background. Furthermore, some important

information is collected from the official UK government statistics Web site that

provides current data on the economy of Great Britain.

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Current labor market tendencies and unemployment level in Great Britain.

1.1. Macroeconomic analysis.

First and foremost it is important to explain the definition of the term

“unemployment” that is central to this chapter. According to the definition of the

International Labor Organization the unemployed group of people comprises all

persons above a specified age who during the reference period have no work, i.e.

are not in paid employment, but who are currently available for work. What is

more, being unemployed implies seeking work, therefore unemployed people

must take specific steps in the reference period such as registration at a public or

private employment exchange or checking at worksites to seek paid employment

or self-employment.

From the macroeconomic point of view, the British labor market is

considered to perform remarkably well in recent years except for the period of

the global financial crisis. As it is argued in the Oxford Review of Economic

Policy devoted to the Recent Performance of the UK Labor Market[4] since the

economic challenges of the early 1980s, UK unemployment moves in parallel

with the best performers in Europe such as Denmark, Ireland and the

Netherlands. As for the key factors that have substantial impact on the

unemployment level, first of all inflation expectations and real wage growth

should be pointed out. Figure 1 in Appendix demonstrates that since 1997

unemployment level in Great Britain continues to fall, flattening out in late 2001

at its lowest level for a generation. At the same time, before the global financial

crisis inflation remains remarkably low and inflation expectations among key

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wage bargainers remain stable over the same period. Finally, real wage growth

turns out to be relatively healthy, so macroeconomic stability is not purchased at

the expense of cuts in average living standards. Nevertheless the situation

radically changes due to the crisis and unemployment level in March 2009

already reaches the level of 7,1% according to the government statistics[10].

However by the end of 2009 conditions on the UK labor market suddenly begin

to stabilize and unemployment rate is predicted to fall this year. Data

concerning unemployment rates is provided in Appendix.

Unemployment classification by gender and qualification.

According to the traditional macroeconomic indicators, such as

unemployment and inflation level, the recent picture of the UK labor market

operation looks particularly favorable. However the unemployed are not the only

people not working. The other group of non-workers is the inactive, which

consists of those who are neither working nor looking for work. This is because

they are either in full-time education, or sick and disabled, or retired early, or are

currently looking after other family members. It is crucial to recognize that the

inactive are not as cut off from the labor market as the name suggests.

Subsequently the inactive can be regarded as the source of potential labor

supply, but they are very different from the explicitly job-seeking unemployed.

The first important point to note is that while the unemployment rate in the UK

declines substantially since the mid-1980s, the inactivity rate has barely changed

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for 25 years. However underlying this extraordinary stability is a dramatic

contrast between men and women. Since 1975, the percentage of non-student

men of working age who are inactive has risen more than five times, around a 10

percentage point increase. By contrast, this is almost offset by a nearly 10-

percentage point decline in the inactivity rate of women[4]. It can be explained

through the fact that women improve their labor-market position relative to men

in terms of both employment and wages.

However this review focuses not only on gender imbalances but also on

those by skill, which worsen systematically over the last 20 years, particularly

among men. Since 1980, workers with no qualifications are considered to fall in

their pay relative to those who obtained some educational qualification[1].

Moreover, in spite of substantial falls in their relative pay, the employment

position of the unskilled seriously deteriorates. Overall, this dramatic shift in

favor of skilled employees takes place due to a significant increase in the

relative demand for skilled workers relative to the rise in their relative supply as

educational standards improve. The relative demand growth is observed partly

because of the bias of technical change in favor of the skilled, and partly because

of changes in the pattern of international trade aimed at skilled workers in the

most developed countries including Great Britain.

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 2. Government regulation of the labor market.

Looking into the reasons for efficient labor market operation and low

unemployment level before the period of the crisis it is necessary to reveal the

influence of the government policy concerning economic and social relations in

the country. Partially such favorable conditions on the labor market of Great

Britain are the consequences of the monetary and fiscal policies that are pursued

by the government.

The strategy of the UK government since 1997 is simultaneously to

encourage work and to provide additional resources to low-skill workers[2]. That

is why this mechanism is two-pronged — to provide assistance in getting into

work and to increase the rewards for working. Overall, these policies have not a

big impact on labor supply and employment, but rather they have a significant

impact in terms of providing extra resources to the low paid who are also

classified as the unskilled. Furthermore, these policies are implemented without

encouraging such employees to withdraw from work.

The basic idea of the New Deal policies that were introduced by the Labor

government in 1998 is to provide resources to assist into work members of a

variety of groups targeted according to age and duration of the period without

work. The New Deal is aimed at giving a chance to unemployed people to train,

learn and get work experience and therefore to become more confident about

working future, get new skills that are needed on the current labor market and

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eventually find and stay in work. What is more, the New Deal is claimed to be

useful for employers who are looking for staff.

Starting October 2009 due to the global financial crisis the basic New Deal

programs are replaced by a different program called the Flexible New Deal that

suggests new policies connected with the current economic situation. One of the

key objectives of the Flexible New Deal is to make sure that it is more profitable

for potential employees to be in work than to live on unemployment benefits.

All New Deals start with an interview with a New Deal Personal Adviser who

helps participants by tailoring the support available through the New Deal to

their individual needs and circumstances. During this interview participant’s

education, gaps in skills, experience and job prospects are discussed. After that

the New Deal Personal Adviser may suggest special programs for improving

qualification.

Furthermore, like in any developed country that protects labor force

interests there is a national minimum wage that is officially adjusted by the

government. The current minimum wage is stipulated at approximately 5 pounds

per hour depending on age group of the unemployed[6].

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 2.1. The role of the International Labor Organization in the labor market
regulation.

The International Labor Organization (ILO) activity is devoted to

advancing opportunities for both women and men to obtain decent and

productive work in conditions of freedom, equity, security and human dignity.

First of all, the ILO aims at promoting rights at work, encouraging decent

employment opportunities, enhancing social protection and strengthening

dialogue in handling work-related issues. Moreover, in promoting social justice

and internationally recognized human and labor rights, this organization

continues to pursue its founding mission that labor peace is essential to

prosperity.

Established in 1919 after a destructive war, the ILO was considered to

pursue a vision based on the premise that universal, lasting peace can be

established only if it is based upon decent treatment of working people. Thus in

1946 the ILO became the first specialized agency of the UN and nowadays it

numbers 183 members both from developed and developing parts of the world.

Great Britain is also one of the members of this organization and therefore

must follow international labor standards established by the ILO. Great Britain

reckons to pursue all objectives of the ILO and comply with the conventions

ratified by the ILO concerning work, employment, social security, social policy

and related human rights.

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 Conclusion.

As a result of this review it can be concluded that the recent performance of

the UK labor market except for the period of the global financial crisis is for the

most part prosperous. Moreover, this review focuses both on the overall

macroeconomic conditions and some of the underlying microeconomic

problems, particularly the ones unskilled workers face. On the macro front

situation on the labor market of Great Britain is defined as rather favorable due

to a continuing decline in unemployment to its lowest level for a generation

without excessive inflationary pressure. Although there are radical changes of

these conditions due to the crisis it is possible to assume that the UK labor

market is expected to recover in the near future.

Furthermore, as for the government regulation of the labor market in Great

Britain this research demonstrates that the volume of unemployment benefits

declines over the current period leading to the whole benefit system becoming

much more focused on getting the unemployed back into work. Additionally, the

New Deal and the Flexible New Deal policies targeted on a variety of age

groups provide systematic mechanisms aimed at getting participants into jobs,

especially during the current crisis situation.

Despite prosperous conditions on the UK labor market, there are some

imbalances underlying the favorable macroeconomic labor market performance.

First of all, the key problem is the rapid increase in the level of inactivity among

men, particularly dramatic among unskilled men that can be explained through

the rapid fall in the demand for unskilled male labor, which significantly
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outpaced the fall in supply as educational standards rise. What is more, there are

serious problems connected with the increasing unemployment level due to the

crisis and the government of Great Britain has to solve them during the current

period. It is important to mention that the ILO also plays a significant role in

tackling these challenges.

Therefore it can be admitted that the labor market at present turns out to be

the integral part of the modern economy and current labor market conditions

determine the whole development of the domestic economy, especially in such

developed countries as Great Britain. Furthermore, it is necessary to add that

unemployment problems should be regarded not just as discrepancy between

labor force demand and supply but also as a serious obstacle that exacerbates

inefficient economic operation and complicates further economic development

of the country.

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 References

1. Brian Henry, James Nixon. Unemployment dynamics in UK.

Oxford University Press 200, Oxford Economic Papers 52

(2000)
2. Brian Towers Editorial: the most lightly regulated labor market.

Industrial Relations Journal 30:2 (1999)

3. Budget 2009 - employment and training, from
http://www.direct.gov.uk/en/Nl1/Newsroom/Budget2009/DG_
177697
4. Glenda Quintini, Stephen Nickell. The Recent Performance Of The

UK Labour Market. Oxford Review Of Economic Policy,

Vol.18, No. 2 (2002)
5. International Labor Organization, official website, ilo.org
6. Jobcentre Plus, official website,

http://www.jobcentreplus.gov.uk/JCP/index.html
7. Matthew Cole. Work, Employment & Society: Sociology contra

government? BSA Publications Ltd, Volume 22(1), 2008

8. Speech by Minister for Europe, Jim Murphy, to the Anglo-German

Foundation on 5 December 2007 in London. Retrived January,

20, 2009, from http://www.fco.gov.uk/en/newsroom/latest-
news/?view=News&id=1534467#
9. Unemployment figures: What the analysts say. Retrived February

11, 2009, from

http://www.guardian.co.uk/business/2009/jan/21/unemploymen
t-figures-analysts
10. Unemployment rises but still 0.5 million job vacancies. Retrived

January, 21, 2009, from

http://www.direct.gov.uk/en/Nl1/Newsroom/DG_174144

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 Appendix

Figure 1.
The Recent Macroeconomic Changes in the UK Labor Market
(Source: Glenda Quintini, Stephen Nickell. The Recent Performance Of The UK Labour
Market. Oxford Review Of Economic Policy, Vol.18, No. 2 (2002)

Table 1.
Unemployment in Great Britain
(Source: ILO database, from http://laborsta.ilo.org/STP/guest)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total 1710 1559 1423 1472 1420 1394 1397 1649 1621 1643
Men 1047 942 861 892 867 824 817 959 930 969
Women 663 617 562 580 553 570 580 690 691 674
Rates,
total 6.0 5.4 4.9 5.0 4.8 4.7 4.6 5.4 5.3 5.3
Rates,
men 6.7 6.0 5.4 5.6 5.4 5.1 5.0 5.8 5.6 5.7
Rates,
women 5.1 4.7 4.2 4.3 4.1 4.2 4.2 4.9 4.9 4.7

Figure 2.
(Source: ILO database, from http://laborsta.ilo.org/STP/guest)

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 Unemployment in Great Britain

1800
people (thousands) 1600
1400
1200
Total
1000
Men
800
Women
600
400
200
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
year

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