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

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Page 2: Changes in the market

Department For Education And Employment 4 Diagram 2The 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 2.1% to 5.2% in 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 6.6% is lower than the lowest rate attained (7%) during the most recent phase of rapid economic growth in the 1980s. Unemployment has several disadvantages.

  1. It has an enormous social cost for individuals and communities.
  2. It leads to a considerable waste of resources. For example, for approximately 20 years prior to the Second World War, unemployment averaged at least 10% in this country with idle machines, factories and employees.
  3. Rises in unemployment lead to falls in consumer spending. A small fall in consumer demand can lead to a much bigger overall change in incomes and spending. This cycle is known as the multiplier.
  4. Unemployment imposes a financial cost on workers and the Government. This is because the unemployed in the UK receive benefits which are financed from taxes. As the term of unemployment increases, people’s work opportunities reduce and they, in turn, reduce their efforts to seek work and can become excluded from the labour market. This can lead to an increase in poverty and inequality.

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