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1
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• Lecture2.ppt
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The Cost of Unemployment

• However, involuntary unemployment means an excess
  of labour supply at the going wage rate - people
  are worse off unemployed
• This may bring about social as well as economic
  consequences
• These differences present a problem for planners

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Facts Figures

• The unemployed are valuable resources whose
  potential output is wasted
• During times of high unemployment there is a
  potential part of GDP that is not produced
• The cumulative loss of output 1991 - 1993 was 70
  billion (1990 prices)
• 1,200 for every member of the UK population or
  2,700 for each member of the workforce

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The Cost of Unemployment

• If unemployment is voluntary time and effort may
  be wasted in attempting to remedy problems
• If unemployment is involuntary, planners need to
  understand its nature in order to provide for the
  long term.

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Exploding Some Myths

• The existence of high unemployment often prompts
  ill considered and hasty remedies
• There is a fixed number of jobs to be shared out
  so job sharing may be an answer. This may well
  prevent able and well qualified employees from
  contributing their maximum to GDP - the number of
  jobs is not increased through extra economic
  activity

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Exploding Some Myths

• A variation on this theme is enforced early
  retirement - economic consequences are the same
• New technology destroys jobs - but historical
  analysis suggests that when technological
  progress accelerates so does growth, living
  standards and employment

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Exploding Some Myths

• Competition from low wage countries is
  responsible for much current unemployment -
  evidence suggests that overall imports from low
  wage countries is too small to account for
  significant unemployment
• We should put up trade barriers to keep jobs at
  home - protectionism decreases overall economic
  welfare, increases costs to consumers, and
  particularly affects those on lowest incomes

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Policy Implications

• The market does not efficiently allocate
  surplus labour to where it is needed
• A number of distorting influences tend to make
  unemployment higher than is economically efficient

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Policy Implications

• The two major distortions are
• The benefit system
• The system of wage determination
• However, these distortions do not mean that
  unemployment is too high in every country that
  depends on government policy

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Reasons for Intervention

• The labour market, like the goods market, suffers
  from imperfections
• The point of policy is to iron out these
  imperfections
• It is possible that some planned intervention
  into the labour market may be in the long term
  interest of the economy

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Demand Side Employment Policies

• Placement Services - involved at the moment a
  worker became unemployed
• Best possible information about the labour market
  not only locally but elsewhere
• Compulsory notification of vacancies

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Demand Side Employment Policies

• Retraining
• Hard to place workers sent on high quality
  courses often as soon as they became unemployed
• This allows experienced workers to move into
  developing industries

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Demand Side Employment Policies

• Retraining
• Hard to place workers sent on high quality
  courses as soon as possible after they became
  unemployed
• This allows experienced workers to move into
  developing industries

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Demand Side Employment Policies

• Recruitment Subsidies
• If unemployed for 6 months potential employers
  offered 50 wage subsidy lasting 6 months
• The Right to Work
• Local Authorities act as employers of last resort
• Provides for up to 6 months work
• Counter-cyclical most uptake in times of
  economic downturn

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Current Example

• New Deal
• But
• Jobs provided this way may displace labour in
  other firms - substituting the subsidised
  unemployed for other workers

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Limitations

• However, this will only apply if there is a
  limited demand for labour - there is a limit to
  the demand within the economy
• If there areskills shortages acting as the
  limiting factor, then AEPs should improve things

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Consequences

• But, improving long term unemployment may lead to
  an increase in short term unemployment in order
  to restrain wage pressure
• AEP is also criticised for spending money on
  things that would have happened anyway - the
  market will eventually solve the problems
• This is the 'dead-weight' argument

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Who Pays for It?

• If increased employment within the economy leads
  to a rise in wages, are private sector jobs
  'crowded out' by public sector employment?
• Increasing taxes on firms to fund employment
  measures could force firms out of business

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Who Pays for It?

• An entrepreneur planning a start up business may
  have second thoughts if the tax rate increases
• How beneficial is the accompanied increased
  bureaucracy to the economy?

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An Aside

• Wage determination
• The system of wage determination is technical and
  a very brief synopsis is included here for
  completeness
• Wages in the UK economy are not usually set by
  the market. They are determined in 3 ways

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An Aside

• Bargaining between employers and unions or
  employees
• The statutory minimum wage
• Both tend to set wage levels above the market
  rate - may result in fewer workers being employed
  
• Government incomes policies
• Often short term success followed by catching up

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The Way We Were

• A history of intervention
• Unco-ordinated
• Hastily implimented
• Political considerations
• Short termism
• Inadequately funded

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Objectives

• To directly intervene in the local economy to
  increase the quantity and quality of jobs for
  local people
• To decrease the level of local unemployment
  particularly within vulnerable groups
• To satisfy social as well as profit making
  objectives

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Objectives

• In specific terms
• to provide means for intermediate and direct
  intervention in the local economy to prevent loss
  of jobs by plant closures or in situ
  redundancies
• to plan for the long term development of the
  local economy to secure future employment and
  production to meet social needs

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Objectives

• to support the unemployed
• to improve the quality of employment
• to explore alternative forms of business
  organisation and extend workers' control
• Usually implimented by Local Authorities e.g.
  GLC, Greater Manchester, Strathclyde

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Objectives

• Different LAs have adopted varying approaches to
  achieving these objectives
• But there are a number of common features which
  we can put under 4 broad headings

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Objectives

• Direct intervention in production
• The role of the public sector
• Democratic planning
• Labour market policies

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Objectives

• The objective is to develop alternative forms of
  employment and train labour to cope with the
  effects of new technologies

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Direct Intervention

• National and international restructuring of
  production led to a concentration of unemployment
  in urban areas
• Decision makers in the process are the firm
  owners/managers and the government

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Direct Intervention

• If you can't influence the government try to
  influence the firms to restore full employment
• Policy measures tend to focus on large/medium
  indigenous firms not the branches of larger
  concerns

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Direct Intervention

• Also, use sector studies to identify
  strategically important employers in the local
  economy and target limited LA resources
  accordingly
• Recognise the fact that restructuring is
  inevitable but rather than leave it to market
  forces use intervention to 'cushion the process
  of restructuring'

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The Public Sector

• It is still a very large employer
• In many urban areas the LA is the largest single
  employer in the area
• This allows the LA to affect directly the level
  and conditions of local employment

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Public Sector

• It also makes LAs significant purchasers of
  locally produced goods and services
• LAs can also influence the operation of the local
  labour market through its own employment
  recruitment and training policies
• It then can bring influence to bear on the
  practices of local firms who compete for the LA's
  business

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Labour Market Policies

• Create and retain jobs - but not at any price
• Quality of work and equal access to employment
  also important - modern enterprises should
  provide satisfying jobs

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Labour Market Policies

• So enterprises offered assistance usually have
  conditions imposed
• Health safety, equal pay etc
• Equal opportunities
• Recognition of TUs
• Training provision etc.
• Special provision may be made for vulnerable
  groups such as ethnic minorities or women

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Changing Emphasis

• Considerable differences existed in the practical
  approaches used to implement these policies
• Las gave way to Enterprise Boards which became
  Enterprise agencies
• Scottish Enterprise

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The Role of Enterprise Cos

• act as a catalyst for regeneration of local
  economy
• strategic intervention to create and preserve
  jobs
• provide long term development capital for
  investment in local companies
• attract other investment funds which will
  multiply the impact of public sector investment
• LEC representatives often take directorships on
  co. boards