Making the labour market work better
A Capita/DfES case study

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Page 3: Changes in the labour market

The demand for labour is what economists term a derived demand. Generally, employers do not want labour for the sake of hiring labour, rather, they hire employees to make goods and services which are demanded by final consumers. In simple terms, we can say that the demand for labour is derived from the demand for goods and services.

The sale of goods and services is highest when the economy is growing strongly. Therefore, economic growth leads to a higher demand for labour to produce those goods and services and a lower rate of unemployment. The figures for unemployment and economic growth in the UK since the 1960s, confirm that every time economic growth is negative, unemployment rises and does not fall back until the economy starts growing again.

However, after each recession in Europe, unemployment has not returned to pre-recession levels. For instance, as a result of the recession of 1974-75, in the UK, unemployment rose from 2.1to 5.2in 1977. When economic growth recovered, unemployment only fell back to a minimum of 4.6 More recently the UK has shown that this trend can be broken. Unemployment currently continues to fall even though today's rate of 6.6is lower than the lowest rate attained (7 during the most recent phase of rapid economic growth in the 1980s.