Case study

Principles of Macroeconomics (CRN: 20169)

Spring Term

Farid Bayramov, Aylin Aliyeva, Ayan Gadirova, Fikrat Fataliyev

Instructor: Nargiz Heydarova

Date of Submission: 08.03.22

Analyzing unemployment rate in the United Kingdom

One important issue influencing the British economy is unemployment. Changes in GDP,
consumer and government expenditure are all affected by the health of the labor market and the
number of people actively employed. In that regard, the unemployment rate is a key indicator of
economic health because it reflects the proportion of the labor force that is currently
unemployed but actively looking for work (Bondarenko, 2019). Considering its importance, The
UK's Office of National Statistics (ONS) regularly releases statistical data on the labor market,
offering valuable insights into the most recent trends and data.

According to the most recent data available that is published on 14 February 2023, the number of
working hours has declined over the prior three months and continues to be lower than it was
before the coronavirus (COVID-19) pandemic (Watson, 2023). The calculated employment
rate was 75.6%, up 0.2% from the prior quarter but down 0.9% from levels seen before the
epidemic (Watson, 2023). Unemployment was determined at the rate of 3.7%, which has seen
0.2 percent decline before the outbreak (Watson, 2023). Lastly, with an assessed 21.4%, the
economic inactivity level is down from the previous quarter but up from pre-pandemic levels by
1.2% (Watson, 2023). The below graph taken from ONS better visualizes how unemployment
rates have changed over the years in the United Kingdom:

Figure 1 Unemployment rate over the years Source: ONS

In the above graph and data, the effect of coronavirus on the country is already visible, but it was
only a mere fraction of the actual impact. Britain in general has one of the strongest economies
in the world. In 2021 and 2022, with about 3.2 trillion U.S. dollars the country ranked in fifths
and sixths places respectively (O'Neill, 2023) (Department, 2023). However, COVID-19 had a
tremendous impact on the overall economy. An unprecedented monthly decline in GDP of 18.9
% occurred in April 2020 in the United Kingdom (Clark, 2022). An annual 11% decrease was
also observed in that year (Clark, 2022). While gross domestic product growth resumed in the
months that followed, but only on November 2021, the British economy reached its pre-
pandemic peak (Clark, 2022). To mitigate comparable damage to the labor market, the United
Kingdom instituted a massive furlough program that, at its peak, contributed to the salaries of
almost 8.8 million individuals (Clark, 2022). A strong second outbreak of the virus in late 2020
slowed the economic recovery to some extent. Only by the beginning of October 2021, with the
economy being stabilized again, and the furlough plan could be discontinued (Clark, 2022). The
below graph shows the economic growth of the UK over the years and the impact of COVID-19
in more detail: 

Figure 2 Gross Domestic Product change over the years in the UK. Source: World Bank
 Analysis

All types and reasons for unemployment

There are two types of unemployment: structural and frictional. Structural unemployment mainly

occurs to such reasons as an insufficient quantity of jobs. It may be a result of the shifting of the

workplace, the skills of labour becoming irrelevant and outdated. Many affiliations change their

geographical position and if a person is not able to move due to social and economic

complexities, he/she will be left without a job. Here the complicated process of job search

begins. People will attempt to find a job that fits their economic expectations and tastes and that

will take time. The concept of frictional unemployment is of high relevance here. Because

people will always search for a job that better fits their interests and considering that this process

is not always successful, some of them still will not be able to find a job appropriate for their

tastes and competence (Mankiw&Taylor, 2017). Mankiw and Taylor (2017) take the

hypothetical example of 5 men who are waiting for generous unemployment benefits. 4 of them

are unemployed only for one week whilst one is the person who is unemployed in the long run,

i.e. he never has worked and probably is outside of competition for vacant workplaces if ever
they will have appeared. On the other hand, it confirms that unemployment in general enjoys

short spells. Having unemployment is natural and it arises usually because of frictional

unemployment. Coming back to the point of structural unemployment should be indicated labour

market rigidity which occurs primarily due to the laws and regulations such as minimum wage

policy, labour unions, employment protection laws, as well as above mentioned generous

unemployment benefits.

As we can observe from the graph when there is minimum wage legislature, the wage floor is

created which prevents forces of supply and demand from entering the equilibrium. According to

Mankiw and Taylor (2017) since minimum wage policy is established primarily for teenagers

whose skills are underdeveloped and who are vulnerable to substitution. At the same time, there

have been serious discussions in the economical thought on whether unions are advantageous, or

they affect the economy adversely. From one perspective, it prevents market employers from

becoming monopolistic in terms of the power they have in bargaining with their employees.

From a different angle, the quantity of labour demanded is reduced which consequently results in

the growth of the unemployment rate. As it was made clear, the consensus is matter is absent
(Mankiw&Taylor, 2017). Employment protection laws obligate employers to pay compensation

in the case of firing, so firms become more careful in hiring workers. The last comes the theory

of efficiency wage which suggests that wages above the equilibrium level are beneficial for the

firm’s operation. There might several reasons behind it. Above all, comes worker health. The

workers are more productive when there is enough money to sustain their health and nutrition.

Although its application is limited since it applies mostly to developing states. From a different

point of view, a stable wage prevents the worker from so-called “turnover”, i.e. workers will

avoid seeking other jobs since they will attempt to maintain the same amount of income. From

this point occurs another type- worker’s effort. After creating a wage floor, the employee will do

their best to preserve the job and avoid the firing. Finally, wage determines the quality of a

worker. The worker who seeks a higher salary is usually proficient in the field whilst the one

who agrees upon conditions of lower income lacks skills and due to that agrees to any possible

wage (Mankiw&Taylor 2017).

Hypotheses

We analyzed the unemployment rate of the UK starting from 1966 to 2016. As is observable

from the graph, the unemployment rate is fluctuating. In 1966 which is considered our referent

point, the level of unemployment was low. Then it started to grow by little. Our first assumption

is that it might happen due to the wage policy. There is a probability that in aftermath of World

War 2 poverty and labour abuse became such acute issues that the government decided to

provide policies aiming at creating more equality in the economy. Although the minimum wage

has been raised, many workers remained outside of employment because their skills were not

demanded (it may have also occurred because a qualitative quantity of residents during World

War 2 could not receive a proper education and therefore pass these skills to new generations.

So, human capital has been weakened). Another reason may be that Europe has been

considerably dependent upon the USA (Marshall Plan) due to the diminished physical capital.

The started process of colonization also marked the fact that former European empires and
especially Great Britain could easily extract natural resources from far parts of the world. As we

see the biggest wave of unemployment is observable in the period between 1979 and 1988.

Considering such a big upswing in unemployment cannot be caused by frictional unemployment

and that is higher than the natural rate of unemployment, we suppose that it may be caused by

another factor such as trade unions. We hypothesize that a minimum wage policy and a high rate

of unemployment united workers hoping to acquire at least some job with an acceptable salary.

We assume that has caused an even greater rate of unemployment because the quantity

demanded has reduced. After a small period of economic stability, since 1993 another wave has

started. We suppose it may be caused by the fact that after the secession of former USSRs

republics, they adopted laizzes-faire policies, therefore substituting their primality-existent

command economies. As a result, more states have entered the global market by making

competition more challenging. In 2008-2011, after the decade of the natural unemployment rate,

unemployment again rose substantially. It is probably caused by the economic global crisis.

Today's rate of unemployment is close to the natural rate and supposedly is a result of the basic

frictional type of unemployment

Data analysis

Nickell et al. (2005) seek to explore the reasons behind the occurrence of unemployment in the

UK and OESC and the factors influencing it from the 1960s till the early 1990s. The authors start

by claiming that many people mistakenly believe that high rates of unemployment during that

period have been the results of market rigidities such as protection laws, minimum wage policy,

as well as trade unions. Nickell et al. (2005) analyze each of them separately. The authors start

with generous unemployment benefits. Analyzing divergent family types in different duration

categories, the authors indicate that such states as Italy experienced a high rate of unemployment

whilst at the same time the system of unemployment benefits has been nearly absent. In sharp

contrast, the UK has curtailed its governmental spending on benefits which was not useful in

avoiding the high unemployment rate that started from the 1990s onwards (Nickel et al., 2005,
1.1). Analyzing wage determination and unionism, the authors claim that several mechanisms

called coordination have been enforced in many states-members of OESC. By taking into

consideration aggregate employment implication of wage determination, coordination, therefore,

prevents adverse effects caused by unionism on employment (Nickel et al., 2005, 1.2). Further

protection laws have been indicated (Nickel et al., 2005). Research highlights that adopting

protection laws as a lens through which the unemployment rate of the 1960s can be analyzed

lacks historical evidence considering that protection laws had not been introduced to most

members of OESC until the 1970s. It can neither be utilized as the explanatory tool for defining

today’s cause of unemployment since such states as Great Britain and Switzerland's protection

law system is weak (Nickel et al., 2005, 1.3). The authors finally posit that 55% of

unemployment booms appeared in the 1960s and at the beginning of the 1990s, as well between

those periods are not the effect of labour rigidities rather, they have occurred by shifts in market

institutions which result in employment disequilibrium (Nickel et al., 2005). Analyzing the effect

of the global economic crisis of 2008-2011 on the rate of unemployment, Pissardies (2013)

indicates only USA and UK had reliable data regarding the rate of unemployment. This has

specifically appeared because both states utilize survey methods. The labour forces survey (LFS)

divides the population into three categories: employed, unemployed and economically inactive.

The person is considered to be unemployed. Homemakers, retirees and fully engaged students

are not considered as part of the labour force (Mankiw&Taylor, 2017). Explaining the

unemployment rate that occurred during the economic crisis of 2008-2011 would be considered a

flawed way of reasoning since the issue was not that jobs were not fitting workers’ tastes rather

there were not enough workers in general (Pissardies, 2013, II). At the same time, the author

mentions that the state suffered mostly from the recession itself rather than its structural flaws.

Finally, coming to our days, Blondeel (2020) underlines that the Covid-19 pandemic temporarily

increased the unemployment rate in the UK. The author also mentions that the force majeure

situation with Covid-19 took our attention from environmental and energy resources-related
issues and their governance such as the decrease in the amounts of subsidies for fossil-fuels-

related companies. This also implies the shutdown of coal plants, as well as required retraining to

get additional professional skills (Blondeel, 2020).

Results

Our first hypothesis did not receive factual support. In contrast, it has been revealed that the high

rate of unemployment was caused by shifts in market institutions (Nickel et al., 2005). Although

no qualitative data has been found regarding the correlation between post-war effects and the

rate of unemployment in the UK which is a main limitation of this study. Moreover, our second

notion found its rebuttal as well. Explaining the boom in the unemployment rate in the period

between the 1970s and 1980s in terms of unionism was at least a limited view since a

considerable number of governing mechanisms preventing the workers’ unions from establishing

their monopoly over the market forces was not considered. Our hypothesis that the growth of the

unemployment rate at the beginning of the 1990s is correlated with the secession of former

USSRs republics did not find confirmation. On the other hand, this phenomenon has been also

explained largely in terms of shifts in market institutions rather than market imbalances (Nickel

et al., 2005). Our fourth assumption was mostly confirmed. The evidence demonstrated that the

recession itself resulted in a higher unemployment level in the UK, not its structural imbalances.

In contrast, the opposite data has been found about the USA (Pissardies, 2013). Our last

hypothesis was refuted as well. As revealed, UK’s current unemployment cannot be simply

explained in a simple frictional concept. Claiming it means missing qualitative amounts of

factors including the fact of existence in the post-Covid-19 epoch, as well as ignoring strict

policies adopted by the UK’s government toward climate and energy resources-related matters.

Such policies consequently in the closure of many plants particularly coal ones and labour skills

becoming “outdated” and requiring retraining. These factors are direct signs of structural
unemployment that were absent in our hypothesis which insisted mostly on the effects of

frictional unemployment.

Improvement policies

English economist John Maynard Keynes (1883-1946) is instructive here. He proposed what

have been later called the neoclassical theory of unemployment. Keynes explained

unemployment in terms of endogenous and exogenous variables. The economist considered the

unemployment rate, wages, and prices as endogenous variables whilst productivity was an

exogenous variable. Keynes proposed several ways of achieving “full employment”. First,

Keynes differentiated between a wage and a real wage. Whilst the former refers to the salary

workers receive in the labour market; the latter emphasizes a wage dictated by the business

market. It means that the decision to mark u any costs depend upon the business corporation

itself. Considering that during expansion in demand, as well as output of production, it means

that real wages are adjusted and therefore reduced automatically without any additional effort to

tackle unemployment. There are certain limitations of Keynes’s vision as well. Above all,

NAIRU or natural rate of unemployment explained in terms of mass involuntary unemployment

seems of little relevance nowadays. Although the notion of wage bargaining is of high relevance,

it, however, fails to explain why real wages remain high during unemployment. Both

assumptions similarly fail to introduce capitalism as a system of self-governing

(Cornwall&Cornwall, 1997). From a different perspective, if businesses found a way to avoid

the minimum wage legislation discussed above, it may seem that they at least at this stage could

escape unemployment, but it is ignoring several other factors. The absence of a minimum wage

may encourage employees to become loyal to unionism and bargain with their business bosses.

Among the potential requests may sound protection laws as well which trace back to the notion

of hiring problems (employers would be so careful about firing someone, that they will,

probably, be extremely selective in hiring new workers). So, the reduction in real wages by
business corporations proposed in Keynes’s works does not seem like an appropriate solution. It

leads to a search for another way of curing unemployment issues. This time structural (cyclical)

unemployment is considered. Jones (1992) begins with income maintenance and health

insurance. Improved income assistance programs are crucial in tackling poverty. It is the attempt

taken to provide some kind of “equity” in the economy. Additionally, by postponing the entrance

of youth into labour, as well as overcoming the gap between “producers” and “non-producers”.

Further, the researcher emphasizes work ethic. He argues that it is necessary to redefine

childcare in terms of work performed by a woman and create so-called “mothers’ wages”. So,

women will have a choice between staying at their current job or completely dedicating

themselves to homemaking. Since business corporations will fear losing a qualitative amount of

woman employees, they will also increase wages. This argument, however, has been

considerably criticized because it is provided by feminist ideologists to advantage only the needs

of female employees (Jones, 1992). Moreover, this policy will also result in something similar to

minimum wage legislation. Jones (1992) separately mentions the concept of “equity” already

mentioned above. Equity is preventing one group from receiving more advantages at the cost of

another. It involves the prevention of labour discrimination. Another point is that equity also

accounts for personal specific needs. Some people desire to spend more time with their family

and friends and therefore work partially. Several educational programs have been provided for

people challenged by unemployment aiming at improving their psychological and motivational

condition. Equity is the most preferred policy for tackling unemployment for us since the

interconnectedness between tackling such issues as inequality and poverty on one hand and

unemployment on the other should be acknowledged. Other views also put an accent on social

value by analyzing unemployment on the matter micro level. There have been serious claims

about stable leisure activities (the idea coming since the times of Ancient Greece). Leisure

implies the amount of free time the worker can spend with his/her family and friends. In general,

the majority of critical approaches toward tackling unemployment recognize psychological and
physical factors play important role in determining whether the worker is “proactive” or

“counterproductive”. Mental health and measures taken by local representatives such as in the

UK are also of high relevance to dealing with high unemployment since they are useful in

assisting people who have lost job recently, therefore boosting participation (Jones, 1992). We

finally posit that providing equity is comparably the most advantageous way of overcoming

unemployment because it involves and can provide all components mentioned above including

leisure, psychological help, as well as local authorities representing your economic interests in

front of central authority.

Conclusion

In this research paper, we have analyzed the fluctuating unemployment rate of Great Britain for

the last 50 years. We provided the historical data and interpreted the graph demonstrating the

condition of the UK’s unemployment in different periods. We provided all possible reasons for

unemployment occurrence. We draw several hypotheses from our observations. Further research

widened the boundaries of our innate assumptions. As revealed, only one of the five hypotheses

provided by us was confirmed. We have also discussed the limitations of our research, as well

provided several ways of governing employment. Although the research was conducted

scrupulously, there is an undeniable demand for further investigation of this theme. The sources

utilized throughout the paper are peer-reviewed, but at the same time, there might appear the

disagreements between divergent reputable authors implying that a clear consensus on this

matter is absent. In our research, we attempted to combine several points to achieve the most

prominent conclusion as we engaged in debate regarding the most preferable governmental

policy toward solving the problem of education and gave several arguments supporting this

position. Finally, we believe that our research could answer some of the possessed questions that

remained untouched till today, as well as reduced the gap between different schools and

approaches in terms of the causes of the UK’s unemployment and the possible solutions to it.
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