Unemployment is a key macroeconomic objective for governments across the world. The unemployment rate for the UK now stands at 7.9% according to the ONS, which recorded 2.56 million people out of work. But why is unemployment of such importance? What are the costs?
The economy is already in a vulnerable state and with unemployment rising by 70,000 people between December and February 2013, the state of the economic recovery has been questioned. Indeed, following the news of the worsening unemployment data, the pound fell significantly against the dollar, suggesting a lack of confidence in the British economy.
Although the increase in the number of people out of work is concerning, perhaps of more concern should be the number of long-term unemployed. The ONS suggests that more than 900,000 have now been out of work for more than a year. Not only does this pose costs for the individual in terms of lost earnings and skills, but it also imposes costs on friends and family and the wider economy. (Click here for a PowerPoint of the first chart, which shows the percentage of unemployed people out for work longer than 12 months.)
The chief executive of the Prince’s Trust focused on the costs of youth unemployment in particular, saying:
Thousands of these young people are long-term unemployed, often facing further challenges such as poverty and homelessness. We must act now to support these young people into work and give them the chance of a better future.
(Click here for a PowerPoint of the second chart, which shows how much higher the unemployment rate is for young people aged 18 to 24 than it is for the working age population as a whole.)
Furthermore, with so many people unemployed, we are operating below full-employment and thus below our potential output. Furthermore, the longer people are out of work, the more likely it is that they will lose their skills and thus require re-training in the future or find that there are now fewer jobs available to them based on their lower skill level.
In addition to this there are monetary costs for the government through lower tax receipts, in terms of income tax, national insurance contributions and even VAT receipts. With more people unemployed, the numbers claiming various unemployment-related benefits will rise, thus imposing a further cost on the government and the taxpayer. Another cost to the government of this latest data is likely to be the expectations of the future course of the economy. Numerous factors affect business confidence and unemployment data is certainly one of them. The concern is that business confidence affects many other variables as well and until we receive more positive data, the economy recovery is likely to remain uncertain. The following articles consider this topic.
UK unemployment rise adds to pressure on Osborne’s austerity strategy The Guardian, Phillip Inman (18/4/13)
Unemployment figures are ‘worrying’, David Cameron’s spokesman says The Telegraph, Peter Dominiczak (17/4/13)
UK unemployment rises to 2.56 million BBC News (17/4/13)
Unemployment jumps to 7.9% as rise in the number of young people out of work takes figure ‘dangerously’ close to a million Mail Online, Leon Watson (17/4/13)
Unemployment up as stay-at-home mothers head back to the job-centre Independent, Ben Chu (17/4/13)
Jobs data points to finely balanced market Financial Times, Brian Groom (18/4/13)
Hugh’s review: making sense of the stats BBC News (19/4/13)
Questions
- How is unemployment measured?
- What are the costs to the individual of being unemployed?
- What are the wider non-monetary costs to society?
- Explain the main financial costs to the wider economy of a rising unemployment rate.
- Illustrate the problem of unemployment by using a production possibility frontier.
- Could there be a negative multiplier effect from a rise in unemployment?
Much has been written on Margaret Thatcher following her death at the age of 87 on April 8. But getting a calm assessment of both her time in office and her legacy is not easy. And it’s clear why: she created both stronger loyalty and stronger opposition than any other UK Prime Minister.
As economists, however, we should try to be as dispassionate as possible in assessing the effects of policies. There is always a normative question of the relative desirability of different economic outcomes – and you will have your own views on the relative importance of objectives such as economic growth, greater equality and greater social cohesion – but to determine cause and effect, or at least correlation, requires a careful examination of the evidence. Also, drawing lessons for future policy requires a careful modelling of the economy and the effects of changing economic variables.
The following articles have been selected from the hundreds that have appeared in the press in the past few days. Whilst they cannot be claimed to be totally ‘objective’, taken together they give a good overview of her economic policies and her economic legacy.
You may well have been surprised by the amount of coverage of her death and at the fervour of her supporters and critics. But this bears witness to the huge effect she had on both the political scene and on the UK economy – for good or bad.
Articles
Margaret Thatcher’s timeline: From Grantham to the House of Lords, via Arthur Scargill and the Falklands War Independent (8/4/13)
Overhauls Are Still Felt, Debated Decades Later Wall Street Journal, Charles Forelle (9/4/13)
Margaret Thatcher’s Four Ages of Monetary Policy EconoMonitor, David Smith (10/4/13)
How Mrs Thatcher smashed the Keynesian consensus The Economist (9/4/13)
Margaret Thatcher: The economy now and then BBC News, Stephanie Flanders (10/4/13)
Did Margaret Thatcher transform Britain’s economy for better or worse? The Guardian, Larry Elliott (8/4/13)
A look back at Margaret Thatcher’s economic record Washington Post, Dylan Matthews (8/4/13)
Margaret Thatcher’s legacy for business and economics—the world weighs in Quartz, Gwynn Guilford (8/4/13)
Data
Economic Data freely available online The Economics Network, see especially sites 1, 2, 3, 6 and 9
Questions
- Summarise the macroeconomic policies followed by the Thatcher government from 1979 to 1990.
- Chart economic growth, unemployment and inflation over Margaret Thatcher’s time in office. How does the performance of each of these indicators compare with the period from 1990 to 2007 and from 2008 to the present day?
- What is meant by ‘monetarism’? Did the Thatcher government follow pure monetarist policies?
- What is meant by the ‘Big Bang’ as applied to the financial sector in 1986? Assess the long-term consequences of the Big Bang.
- What elements of ‘Thatcherism’ were retained by the Labour government from 1997 to 2010?
- To what extent can the current Coalition government be described as ‘Thatcherite’?
Australia is a rich country. It is one of the few to have avoided a recession. This has been the result partly of successful macroeconomic policies, but largely of the huge mining boom, with Australia exporting minerals to China and other fast growing Asian economies.
But has this growth brought happiness? Are Australians having to work harder and harder to pay for their high standard of living? Indeed, do higher incomes generally result in greater happiness? The following articles explore this issue, both in an Australian context and more broadly. They look at some recent evidence.
For example, in one study, Canadian, Chinese, Indian, and Japanese university students were asked what they held to be most important for assessing the worth of their lives. The crucial finding was that although higher incomes may be a contributing factor to increased happiness and well-being, especially for poorer people, other factors are more important. These include developing fulfilling personal relationships, whether with partners, family members or friends; gaining knowledge and wisdom; having enjoyable hobbies; having financial security (as opposed to higher incomes); having a worthwhile career; living a moral life; helping other people.
The question then arises whether our economic systems and incentives are geared towards achieving these outcomes. Or are we encouraged to consume more and more and to seek higher and higher incomes to feed our addiction to consumption?
Is there an information problem here? Do many individuals perceive that money will buy them happiness, whereas, in reality, money can’t buy them love?
Articles
Australia: Where the good life comes at a price BBC News Magazine, Madeleine Morris (24/2/13)
Australia has the know-how to boost wellbeing Sydney Morning Herald, Matt Wade (8/9/12)
Money can’t buy you the good life Independent, Roger Dobson (24/2/13)
The 10 Things Economics Can Tell Us About Happiness The Atlantic, Derek Thompson (31/5/12)
Yes, Money Does Buy Happiness: 6 Lessons from the Newest Research on Income and Well-Being The Atlantic, Derek Thompson (10/1/13)
The fact is, the richer you are, the happier you are The Telegraph, Allister Heath (5/2/13)
Money buys happiness? I wouldn’t bank on it The Telegraph, Christopher Howse (6/2/13)
Who Says Wealth Doesn’t Buy Happiness? The Wealthy Do CNBC, Robert Frank (4/2/13)
More Proof That Money Can’t Buy Happiness Business Insider, Aimee Groth (28/1/13)
Money Changes Everything The New York Times, Adam Davidson (5/2/13)
Why are the Chinese so sad? Maclean’s (Canada), Mitch Moxley (4/2/13)
Reports
First World Happiness Report Launched at the United Nations The Earth Institute, Columbia University (2/4/12)
World Happiness Report The Earth Institute, Columbia University, John Helliwell, Richard Layard and Jeffrey Sachs (eds.) (2/4/12)
Well-being evidence for policy: A review New Economics Foundation, Laura Stoll, Juliet Michaelson and Charles Seaford (3/4/12)
Questions
- Distinguish between necessary and sufficient conditions. Is higher income a necessary or sufficient condition (or both or neither) for an increase in happiness? Does a person’s circumstances affect the answer to this question?
- Explain what is meant by ‘rational behaviour’ at the margin in the traditional economic sense?
- If a person always behaved rationally, would they be happier than if they did not? Explain.
- Explain how information asymmetry between the two or more parties involved in a transaction may make people worse off, rather than better off, even though they were behaving rationally.
- Explain what is meant by diminishing returns to income.Do richer countries get happier as they get richer?
- How would you set about measuring happiness?
- What do you understand by the term ‘hedonic elevation and decline’? Does this provide an accurate description of you own purchasing behaviour? If so, explain whether or not you would like to change this behaviour.
- When people make economic decisions, these are normally made with bounded rationality. How may this affect the desirability of the outcomes of the decisions?
- In explaining bankers’ behaviour, Christopher Howse (author of the second Telegraph article above) states: ‘It’s the power game that keeps them happy, not the money itself. When I say “keeps them happy” I mean “feeds their addiction”. It is a negative kind of satisfaction. A morning spent without the distraction of making big bucks is a morning left exposed to the empty horror of being a little rational animal on the bare surface of the Earth lost in space.’ Do you agree? Explain why or why not.
- When people are addicted to something, would doing more of it be classed as irrational? Explain.
- Why are the Chinese so sad?
In a previous blog, Anyone got a crystal ball?, we reported on the Bank of England’s and other agencies’ difficulty in making forecasts. As the Governor, Mervyn King, said, “There is just enormous uncertainty out there.”
The Bank of England has just published its November Inflation Report. This quarterly publication gives forecasts of inflation, GDP and other indicators. It is clear that forecasting hasn’t become any easier. In his opening remarks, Dr. King says:
Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in Q4 as the boost from the Olympics in the summer is reversed – indeed output may shrink a little this quarter. It is difficult to discern the underlying picture. It is probably neither as good as the zigs suggest nor as bad as the zags imply.
The Inflation Report looks at the various factors affecting aggregate demand, inflation, unemployment and aggregate supply. It is quite clear on reading the report why there is so much uncertainty.
A salutary lesson is to look back at previous forecasts and see just how wrong they have been. The chart above shows the forecasts for GDP made in the Inflation Reports of Nov 2012 and Aug 2011. You can see that they are significantly different and yet just 15 months apart. You might also like to compare the forecasts made a year ago (or even two!) about 2012 with the actual situation today. A good source for this is the Treasury’s Forecasts for the UK economy. This collates the forecasts from a range of independent forecasters.
The inaccuracy of forecasting is an inevitable consequence of a highly interdependent world economy that is subject to a range of economic shocks and where confidence (or lack of it) is a major determinant of aggregate demand. But when firms, governments, individuals and central banks have to make plans, it is still necessary to project into the future and try to forecast as accurately as possible – even though it might mean keeping your fingers firmly crossed.
Articles
Bank of England downgrades growth forecast for 2013 Daily Record (14/11/12)
A gloomy picture from the Old Lady Financial Times (14/11/12)
Will Britain’s post-recession economy be resurgent, stagnant or greener? The Guardian, Larry Elliott (11/11/12)
Economics must heed political risk Financial Times, Sebastian Mallaby (6/11/12)
European Commission autumn forecast: overoptimistic and in denial Social Europe Journal, Andrew Watt (7/11/12)
Bank of England gets long to-do list for overhaul Reuters, Sven Egenter (2/11/12)
Data
Inflation Report, November 2012 Bank of England
Index of economic forecasts European Commission DGECFIN
Economic Outlook Annex Tables OECD
World Economic Outlook Reports IMF
Forecasts for the UK economy HM Treasury
Questions
- What was being forecast for economic growth and inflation for 2012 (a) one year ago; (b) two years ago?
- What are the main reasons for the inaccuracy of forecasts?
- How might forecasting be made more reliable?
- If sentiment is a key determinant of economic activity, how might politicians increase the confidence of firms and consumers? What are the political constraints on doing this?
- Explain the following statement from the Guardian article: “The problem … is that last decade’s tailwind has become this decade’s headwind.” Why is it difficult to forecast the strength of this ‘headwind’?
- How useful is it to use past trends as a guide to the future course of the economy?
Previous posts on this blog have discussed key principles of thinking like an economist and also whether this always makes sense. Highly relevant for this question, on her excellent Economists do it with models blog, Jodi Beggs has recently highlighted the fact that the cognitive costs of obtaining the information required to make decisions in this way can sometimes be excessive.
As an example she cites this scenario from the Cheap talk blog:
“You are planning a nice dinner and are shopping for the necessary groceries. After having already passed the green onions you are reminded that you actually need green onions upon discovering exactly that vegetable, in a bunch, bagged, and apparently abandoned by another shopper. Do you grab the bag before you or turn around and go out of your way to select your own bunch?”
I won’t go through the details of the 12 steps (see the above link) taken to infer from where the onions were abandoned that they were either:
“the best onions in the store and therefore poisoned, or they are worse than some onions back in the big pile but then those are poisoned.”
Based on this inference, the conclusion is that you should go for a take-away instead! As Beggs suggests, the level of effort undertaken to make a decision should depend upon the likelihood that this results in a more informed choice. In the above example this is highly questionable! She then provides the following example suggesting that when you obtain cash back in a store it is much better to ask for the money in small denomination notes. Whilst on face value this again seems like a strange conclusion, the economic logic provided suggests that it may be a much more rational decision than in the onion example.
Article
Just for fun: reasons not to data an economist (thanks guys)…Economists do it with models, Jodi Beggs (25/10/12)
Questions
- Can you provide some examples of decisions where the cognitive costs of obtaining relevant information is very high?
- In these examples, would this information typically result in a better decision?
- What might be the opportunity cost of shopping in the manner described in the article?
- Explain how a rational economic actor should evaluate whether to obtain more information in order to facilitate making a decision.
- The article above suggests that there are a number of benefits from requesting small denomination notes, but what might be the costs involved in this strategy?
Unemployment is a key macroeconomic objective for governments across the world. The unemployment rate for the UK now stands at 7.9% according to the ONS, which recorded 2.56 million people out of work. But why is unemployment of such importance? What are the costs?
