Making the labour market work better
A Department for Education and Employment case study

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Page 3: Why has unemployment increased?

A number of different explanations have been put forward to try to explain the rise in unemployment since the 1970s. Not all of these explanations are valid and no single one fully explains the growth in unemployment.


Department For Education And Employment 4 Image 2Between the 1950s and the 1990s, there was a massive increase in the movement of capital around the world due to the liberalisation of trade i.e. a reduction in barriers to international trade. Trade has allowed countries to exploit their natural resources and comparative advantages. For instance, the developing world is relatively abundant in low and unskilled labour and so is able to produce labour intensive goods, such as textiles, cheaper than the developed Western world. The developed world benefits by importing the cheaper labour intensive products in exchange for its exports of goods and services produced by skilled labour and capital. Developed countries have therefore had to reduce their home production of products such as textiles and the demand has shifted from low-skilled and manual jobs towards higher-skilled occupations. However, the number of jobs has increased and unemployment has resulted because workers and firms do not adapt quickly enough to the changing demand for labour, goods and services.


The rise in technology has also contributed to changes in the demand for labour. Machines have replaced jobs in some sectors or occupations, but have also generated demand for new services and have led to an increase in the number of jobs and in employment opportunities. Together, globalisation and technology have contributed to a net growth in employment. They are the driving forces of rising world prosperity, but have produced a decline in the demand for low and unskilled labour. For instance in the UK, the unemployment rate for those with tertiary level education in 1996 was 3.9% compared with 13% for those who had not completed upper secondary education.

Changes in the demand for labour are likely to continue. This makes it all the more important that the labour force is flexible and adaptable. Other explanations of rises in European unemployment include:

  1. Generous benefit regimes: in the 1970s and early 1980s, the administration of benefits was made less strict, reducing the pressure on the unemployed to seek work. For instance, unemployed claimants in the UK were not required to register at a Job Centre to encourage them to find work.
  2. Growth of trade union power may have permitted employees to demand a higher level of wages relative to the production of each worker. This may have led to a reduction in the demand for labour (however, a number of commentators suggest that this factor has become less significant in the UK during the 1980s and 1990s as the numbers of trade union members have fallen significantly).
  3. A long period of high unemployment meant that the number of long-term unemployed increased and they became increasingly detached from the labour market. Groups particularly affected included the unskilled and semi-skilled manufacturing workers and particularly those over the age of 50.
  4. Employers usually have to pay taxes and national insurance contributions for their workers - this ranges from £18 for each £100 of wages paid in the UK to £41 in France. This makes paying employees costly and discourages recruitment.

Policy making for employability

Most people would agree that in a modern society, it is essential to help all citizens gain meaningful and useful employment with long-term developmental opportunities. Governments have a key role to play in creating the framework which supports existing market structures and removing any weaknesses or faults in current market arrangements.

Traditionally, the UK has had very few labour market regulations. Nevertheless the market is not working perfectly. The New Deal for the unemployed is a good example of the way in which a government has set about helping to make the market work better. The New Deal aims to match unemployed people to jobs and focuses on the groups of people who suffer unemployment most - young people, the long-term unemployed, lone parents and disabled people. The policy package includes provisions for training to be provided to all participants.

Department for Education and Employment | Making the labour market work better