Page 1: Introduction
Unemployment is one of the worst social evils. It saps the self-confidence and motivation of those it affects directly and has knock-on effects for all members of society. By under-utilising labour, the wealth and economic well-being of the country is reduced. Unemployment can also produce poverty and social exclusion.
Taking policy measures to reduce unemployment should therefore be high on the agenda of any government. Today, unemployment is a European-wide issue with over 18 million unemployed people across the European Union. The seriousness of this issue is recognised and the European Council at Amsterdam has agreed a new employment chapter in the Treaty, Council Conclusions on Employment and a Resolution on Growth and Employment. These set a clear agenda at a European level for action to create jobs and attack social exclusion. The primary responsibility for tackling unemployment, however, remains at member state level.
This case study examines the importance of creating an effective labour market in order to reduce unemployment. In particular, it focuses on a specific government economic measure, the New Deal, as an example of the way in which governments can use policy measures to create a more efficient labour market and increase employability. The New Deal is a labour market initiative which aims to improve an individual’s employment prospects and reduce the incidence of long term unemployment by ensuring a continued attachment to the labour market.
The nature of the labour market
In the labour market employers have to compete with each other for human resources. Workers ‘supply’ some of their time and effort to organisations for a wage while the organisations ‘demand’ labour in order to produce goods and services. The labour market plays a very significant role in resource allocation. The interaction of demand and supply determines the price of labour which is known as the wage rate. Wages are most likely to be high in those industries and jobs where the demand for labour is high and where the supply of labour is relatively limited.
The final price (wage rate) is set at a point where the demand for labour is matched by the supply. Even in perfectly functioning markets, there would still be some unemployment as new and more efficient forms of economic activity displaced old and less efficient ones and as people changed jobs.