AS Macro: Unemployment and the Economic Cycle
Study Extracts A and B, and then answer all parts of the question which follows
Extract A
UK Economic Growth and Unemployment
Annual percentage change in GDP at constant prices, percentage unemployed
12.0
12.0
Unemployment (LFS measure)
10.0
10.0
8.0
8.0
6.0
6.0
Percent
Real GDP (Annual % Change)
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
-4.0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: UK Statistics Commission
Extract B
A rise in unemployment suggests that the UK is on the brink of a recession. The jobless
rate for the UK as a whole rose steeply to 5.7% using the Labour Force Survey measure
as the economic slowdown affected the job market. The number of unemployed in
Britain jumped by 164,000 in the three months to August 2008 bringing the jobless total
to 1.79 million. The number of vacancies in the economy fell by 32,200 indicating that
demand for labour is wilting. Unemployment is rising in sectors across the board - from
chocolate makers and home builders to car manufacturers and finance workers - as
employers try to rein in spending to weather the downturn
A Liberal Democrat Treasury spokesman said: "If consumer demand continues to fall,
this will spread across the whole economy. The labour market is deteriorating as the
economy cools, and will have a knock-on effect on consumers' purchasing power."
Unemployment is costly - for the unemployed and their families, for the communities in
which they live, for local businesses, for the taxpayer and for the economy as a whole. It
is difficult to quantify precisely the economic cost of high unemployment because few
can agree on the true number of people out of work. The social costs of unemployment
are also substantial especially when a large number of people are out of work for a long
time.
Unemployment in Britain could soar to well over three million unless the government
takes action, leading economist David Blanchflower has warned. Mr Blanchflower, a
member of the Bank of England's monetary policy committee (MPC), said the
government would have to spend up to £90 billion on new projects to prevent
unemployment figures from doubling. Expansionary monetary and fiscal policies might
help turn the economy round and create a multiplier effect on GDP and jobs.
High unemployment levels in the young is the most worrying aspect, Mr Blanchflower
added, as being jobless at such a key stage in their development could have life-long
effects. Economists remain divided over whether demand or supply-side policies are best
for reducing unemployment in the years ahead.
The International Monetary Fund (IMF) has warned in a recent report that most major
developed and developing countries are now in or close to recession. It said: "The world
economy is now entering a major downturn in the face of the most dangerous shock in
mature financial markets since the 1930s. Britain’s labour market is inevitably affected
by economic events in global markets.
Sources: Adapted from news reports, summer and autumn 2008
Questions
(a) Define the term economic slowdown (5 marks)
(b) Using Extract A, identify two features in the data over the period shown (8
marks)
(c) Explain, with examples and with the aid of a diagram, the economic and social
costs of high unemployment (12 marks)
(d) Using the data and your economic knowledge, assess the view that supply-side
reforms are likely to be more effective than demand-side policies in reducing
unemployment in the UK economy (25 marks)