Unit 2 Macro: Reducing Unemployment after a Recession

How quickly do people find new work after they have been made redundant and experienced a period of unemployment?

According to new research published in the May 2011 edition of the Economic Journal, only around one person in every ten unemployed in Britain finds fresh work within a month and nearly half of the extra unemployed created in the wake of an economic shock such as the fallout from the global financial crisis are still without a new job after six months.

If government economic policies and the labour market generally are failing to get people back into paid jobs the impact of a recession on unemployment rates can last for a substantial time period bringing with it increased economic and social costs.

According to the research, in the 2008-09 recession UK unemployment rose by over 850,000: from 1.6 to 2.5 million. Although this increase was less than many had feared on the basis of past recessions and the severe 6% drop in UK output, the end of recession has not brought a significant fall in unemployment. Instead, the unemployment rate has continued to fluctuate between 7.9% and 8.2%, having risen from a pre-recession low of 5.2% in April 2008 and standing at 7.8% as of February 2011

Some economists argue that government policy in the short term should focus on preventing widespread extra unemployment in the first place - for example subsidies for short-time working (to give employers an incentive to avoid redundancies) and a possible cutting of employers’ National Insurance contributions during a downturn to reduce labour costs.

For those out of work for six months or more (the long term unemployed are those who’ve lost their job cannot easily find a new one), priorities include investment in youth and adult training schemes (including modern apprenticeships), incentives to remain in or move back into full-time education, and effective stimulus policies using fiscal and monetary policy measures to maintain aggregate demand and business investment at a sufficiently strong level to create new jobs.

Long term unemployment is a tough policy problem in the UK. Almost one in five jobseekers in Britain have been looking for work for more than a year and a person’s employability reduces every month they’re not working leading to deep-rooted occupational and geographical immobility of labour.

Official figures for unemployment underestimate the scale of worklessness in the British economy. In the spring of 2011, around 1.5m unemployed claim the Jobseeker’s Allowance but a further 2.6m people of working age are out-of-work on incapacity benefits and another 700,000 claim Income Support as lone parents. In total, Britain has nearly 5m non-employed adults of working age on benefits. These men and women account for 13 per cent of the entire working age population.