Economic environment – Unemployment

There’s some indication that the UK unemployment picture is improving (Unemployment drops to 2.46m) but it’s still a pretty bleak picture out there. What does this mean for business?

Data from Timetric.

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ILO unemployment rate SA United Kingdom Eurostat: monthly from Timetric

Like all good evaluative responses in business, the short answer is “it depends”. There’s a clear upside as well as a downside. On one hand, higher rates of unemployment will tend to hold down demands for wage increases, which are typically the largest cost for most UK businesses. On the other hand, lower wages and less spending power in general is bad for many of the traditional High Street retailers and service providers.

Other points you might like to consider are:

- Higher rates of unemployment strain the government’s finances. The Treasury receives less in income tax and VAT, for instance. At the same time, welfare expenditure rises. This increases the likelihood that at some point, the government will have to cut expenditure in other areas, and/or raise taxes (see debt bombshell).

- Many firms don’t sell direct to the public (they sell to other businesses or government organisations like the NHS). To some extent that shields them from the immediate negative consequences of unemployment.

- Think carefully about the income elasticity of demand for a firm’s products. Stated simply that means asking how demand for goods/services responds to changes in consumers’ income. Some firms have been devastated by the recession, rising unemployment and falling incomes (such as electrical retailer Comet). Others have enjoyed a boom (Poundland).

- Unemployment tends to have a strong regional component see the jobs map on the BBC economy tracker. For this reason, any discussion you have about the impact of unemployment on firms might well also ask about where they are located, and the local circumstances they find themselves in. Some firms in regions with very low levels of income (almost always because of high levels of unemployment) have the possibility of getting UK/EU government aid as an incentive to expand and hire workers.

- Eventually, the economy will recover to full health and many firms will be anxious to hire rapidly to deal with an upsurge in demand. Unfortunately however, unemployment may leave a long term mark. Many formerly unemployed workers will need extensive retraining – much of it provided by firms – before they take up places as effective and productive staff.

(there’s also a good graph covering unemployment since 1984 at The Guardian).