UNEMPLOYMENT AND THE ECONOMIC CLIMATE

Unemployment

Unemployment is created when the number of jobs (the demand for labour) falls in comparison to the number of people looking for work (the supply of labour). Therefore, there are just two things to consider: The demand for labour and the supply.

The demand for labour in Britain is mainly affected by two things:

1. The demand for goods in general and therefore the number of jobs available. If the economy is booming, firms need plenty of fulltime, part-time, and seasonal staff, so there are plenty of job around. In an economic downturn, jobs are far less plentiful.
2. The demand for jobs in Britain compared with overseas: When British companies moved their operation to other countries such as India and China, the unemployment level will increase. This means the demand for labour will decrease. eg. Outsourcing call centres, etc.

The supply of labour in Britain is affected by two things:

1. Demographic factors affecting the number of people of working age plus the number of EU migrants available within the workforce.
2. The willingness of employable people to look for work, which may be weighed down by benefits such as free rent for those out of work, but is boosted by rising minimum wage rates, which help to provide a better financial incentive to work.

In the long term, the above are key factors. In the short term, the main single factor is likely to be the number of jobs on offer. Firms squeeze hard by an economic downturn will stop recruiting and may start to look for redundancies, to cut back on the workforce. This could push unemployment up sharply. In the current global recession, the unemployment rate in Britain has been increased and therefore, the people’s lives are becoming severe.

An exchange rate appreciation tends to cause a slower rate of growth of real GDP (e.g. because of a fall in net exports). A reduction in demand and output may cause job losses as businesses seek to control costs. Some job losses are temporary – reflecting short term changes in export demand and import penetration. Others are permanent if domestic industries move out of some export markets or if imports take up a permanently higher share of the UK market. Some industries are more exposed than others to currency fluctuations – e.g. sectors where a high percentage of total output is exported and where demand is highly price sensitive (price elastic)

Changes in the growth of UK exports – movements in the exchange rate affect the competitiveness of UK export industries in global markets. A higher exchange rate makes it harder to sell overseas because of a rise in relative UK prices. If exports slowdown, then exporters may choose to cut their prices, reduce output and cut-back employment levels. A fall in export demand will reduce real national income relative to potential output – and thus might lead to a negative output gap. This puts downward pressure on inflation

When the exchange rate is high, there is pressure on businesses to control their costs of production in order to remain competitive – this may lead to downward pressure on wage inflation.