To Start We Have to Determine What Unemployment Is

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UNIVERSITY OF KENT

Discuss the extent and causes of

unemployment and inactivity in the UK

today. To what extent does the Coalition

Governments recent welfare-to-work reform The Work Programme provide a

credible solution to tackling these

challenges?

BY PALOMA MARTÍNEZ GUTIÉRREZ

01/12/2011



1

In this figure we can see the evolution of the unemployment rate provided by the Labour Survey

Force and the claimant count. We can see that the trend that both measures follow is similar. We

can do a better analysis of the labour market if we use both of them.

In order to understand the evolution and the causes of the unemployment we have to analyse the

trends that the unemployment has followed. We can see through the history and the different

policies that were taken the changes that the rate of unemployment has undergone.

We do not need to look far into the history to realize that the unemployment behaves in a cycle that

follows the changes experienced by the economy. When the economy grows, more jobs are created

and unemployment falls. The opposite occurs when the economy suffers a recession.

There have been many dramatic changes in the past 20 years in the labour market in UK. Before

1970, the unemployment rate was relatively low. In the conservative years, they failed to carry out

the income policies and the trade was more regulated and restricted than before. Under Thatcher

mandatory GDP per head significantly decreased, these were unequal years. Unemployment figures

experienced a considerable rise, being lower in the first years and increasing with the recession of

1980. However, at the end of this decade, the economy was improving and employment began to

grow progressively. The Labour government try to follow social justice and opportunity. They take

policies to solve the problems regarding work. These policies are the New Deal, the National

Minimum Wage and the Working Families Tax. In this period is intended to safeguard the rights of

workers and working conditions. And began to have a more equal distribution among the

population.

The decline in the unemployment rate was the broad trend until 2004, when the lowest

unemployment rate was reached. Finally we have to stand out the 2008 because of the recession

the unemployment rates started to rise up again.

1Labour Force survey, Jobcentre Plus Administrative system



2

For further study, we have to divide the labour market into different subgroups. The labour force

depends on the sex, ethnicity, age, parental status, and disabilities among other factors. For example,

recessions that occurred during 1980 and 1990 had more impact on the unemployment rate for men,

this happens during 2008 too. Respect to the age, the young unemployment is higher than the older

age groups. Qualifications of the people also have an impact, having the low-skilled higher

unemployment rate. We can talk about more different subgroups and the different rates of

unemployment in which they are subjected.

To discuss the causes of unemployment we have to relate the variables that influence in the rate of

unemployment.

First we have to talk about the inflation. We can see a relationship between unemployment and

inflation rates. When the inflation rate is low there is a tendency to high rates of unemployment,

otherwise happening when inflation rises. We have to get an unemployment rate that is stable with

respect to the inflation rate, this will lead to the equilibrium rate of unemployment. If carry out

expansionary fiscal and monetary prices, the inflation rate increases, which obtains the lowest

unemployment rates. Hence that if the economy is experiencing great growth and the

unemployment rate falls too fast, the inflation rate rises. Nevertheless there are factors that can

alter this relationship between inflation and unemployment rate. If there is a deficit in trade caused

by a high exchange rate, with cheaper imports, it can cause a drop in inflation to maintain low levels

of unemployment. Therefore, the factors that affect the rate of inflation affect unemployment.

2www.statistics.gov.uk/tsdlistfiles.asp



We have to include in this relationship the effects that occur in the balance of payments. To reach

the equilibrium unemployment rate, apart from having a stable rate of inflation, the deficit of the

balance of payments must be zero.

3

However, unemployment is affected by many factors.

Is important to study the relationship between unemployment and benefit system, as this affects

the equilibrium which can be achieved by the unemployment rate. Various features of this system

should be taken into account. We have to consider what type of benefits are offered by this system,

what level they achieve, the duration of the right to obtain it and the restrictions that we can found

in the system.

The system of unemployment benefits can discourage job search. Several governments have tried to

carry out labour market reforms to incentive work. Nevertheless, there are about 12 million people

who have age for work who are receiving benefits and Tax Credits. We should note that this lack of

incentives to work generates higher levels of poverty and welfare decrease.

This system of benefits is causing this disincentive situation, since only induce to work people who

meet certain characteristics. This system does not take into account the incomes. With the Tax

Credit, those working more than 16 or 30 hours receive an additional income. The removal of these

subsidies is progressive, withdrawing the part of the gains outweigh the benefits. However, we can

list several groups who have not enough incentives to work for various reasons. For those workingless than 16 hours, earnings that exceed the amount of the subsidy are lost because they are used

for the repayment of the benefit, so for these people work is not profitable.

For the Working Tax Credit is necessary to work a minimum of 16 hours per week, those who do not

meet the estimated times do not perceive it, therefore they are not supported even though they

have low wages.

3The recent performance of the UK Labour Market



Respect to the Tax Credit is removed through an increase in taxes when the person sees increased

his income. The withdrawal of the subsidy is given from the 16 hour working week. Sometimes the

recovery rate is up to 90% of the income. Hence, this do not incentive the work too.

One of the major concerns arises when people return to work is how quickly they would return to

receive the benefit if the situation is not good. Is also important to consider the loss of the Housing

Benefit or the time until it starts to collect the Working Tax Credit when people start to work.

Sometimes the transition to work it not easy. Above all create a feeling of insecurity and uncertainty.

People perceive the rewards of working very low, since the system of withdrawal of subsidies can be

viewed as a penalty.

Another important factor is we have to examine the role of taxes have respect to unemployment.

Taxes are part of the costs for workers paid by companies and are part of the consumer after-tax

wage which workers do. Taxes related to employment are payroll taxes, income taxes and

consumption taxes. Is important to consider it, because a rise in labour taxes makes workers poorer

and the cost of maintaining and hire workers is higher. As a result of this increase is a greater rate of

unemployment.

A part of unemployment we have to take into account those who neither work nor looking for work.

These are the people who form the inactivity rate. Inactive are those who are sick, have a disability,

are cared for or maintained by another person, people who are in full-time education or those who

retired early. The evolution of the rate of unemployment is not comparable to the evolution of the

unemployment rate. There were no significant variations in the rate of unemployment from 1975 to

1998, it remained more or less constant. In these years we must emphasize the striking difference

between men and women.

However, what we really need to point out is the drastic change that occurs in the inactivity rate

over unskilled workers. Since 1980, these workers suffered a relative decline on his salary in

comparison with those workers who possessed qualification. This situation caused that the inactivity

rate of these workers increased significantly. This increase was most notable for men.

4

4The recent performance of the uk labour market



All this was due to increased relative demand-qualified caused by technological change.

One of the reforms that the Coalition government has undertaken to promote the work and

improve the workforce is The Work Programme. This is a programme was created in June 2011.

This attempts to correct the failures of past reforms, which were often short-term, inflexible and did

not reach those most in need. The target of it is a welfare reform which intends to seek the

sustained work. People who are unemployment for a long time or are in risk of this situation are

supported by this programme.

5

The government try to do that the firms have more incentives to contract people. We can achieve

this through low market regulation and taxation. The government claims the creation of new jobs.

This is achieved through flexibility and dynamism. There is freedom for the service providers to

innovate and the government ensures long-term incentives to get it. This program gives the

payments once results are displayed.

Therefore we can highlight three main features about this program. The first one is the clear

incentives to deliver result. The organizations that help persons who have more difficulties to find a

job have a higher reward. The payments depends on the results, the delivery partners have

incentives to keep participants in work as they more will be paid.

We have to show the freedom for service providers. If the government doesnt put a lot of

restrictions or prescriptions about the way in which providers have to do it, they can innovate, doing

a better manages of their resources and they probably could do a better function. This

demonstrated that the local providers, generally they know better the main needs of the people into

sustained work. They are better to help this people, and it is doing in the best way if they havent got

a lot of restrictions. Therefore the providers have a lot of freedom to design the different measures

to support the individuals, in the better way to fit to the local market. This leads to the creation of

different partnerships with local authorities, colleges or health service.

The organizations that carrying out the program can be of public, private or voluntary sector. They

have a long-term commitment. Generally the contracts are made for five year period. This kind of

contract gives to the providers incentives. With this period, they have time to innovate and to invest

in different fields inside the organization. This doing to that the different provides can do

partnerships with specialist supply chains of local providers and with other organizations, like with

the local government. If we consider the improvement in the structure and in the resources, we can

say that this is a good way to try to achieve success.

5The labour market under new labour



As we have said the providers are paid for results. We have to explain the payment system. The

participants can be paid for two years. We can talk about three different payments that each

participant receives. The fist one is called start fee. This is giving in the first years of the contracts.

This paid finish in the third year.

There is also the so-called job outcome payment. To claim this payment is necessary that the

participant has been working for three or six months.

The last kind of payment is a sustained payment. This is paid every four weeks. The duration of it

varies depending on the ease of the participants for find a job. They can claim this for one year, one

year and a half or two years. This payment pretends to incentive the longer duration of the

participant in the sustained work.

6

This program tries to focus on the individual characteristics of participants. To be a participant the

persons have to be receiving a benefit work-related. Within these benefits can enumerate several

kinds, like Jobseekers Allowance or Employment and Support Allowance. Depending on the reason

why the person doesnt work and the difficulty to find a work the help are a higher amount.

Amounts ranging from around 3,800 pounds to 13,700 pounds. The higher amount is providing to

persons who are receiving benefits for several years, this may be due to a limited capability for work.

This do that the providers have more incentives to contract the most disadvantaged people.

Therefore we can see that the payment depends on the individuals.

Currently, Prime providers are applying 40 Work Programme contracts, spread over 18 regions of

the UK.

6Department for Work and Pensions (2003). The Work Programme.



7

In addition to the payments made. There are other kinds of incentives for the participants and for

the taxpayers. While the contracts are in force, the market share is shifted to the best-performing

providers. The participants of the program are randomly assigned to each provider. At the final of

the second year of the contracts, the provider who has a higher help to the sustained-work is

rewarded with a shift in market share of five per cent between low-performing and high-performing.

The providers who are following the program have to ensure a minimum performance level. This

level is fixed in ten per cent higher than if they dont participate in the program, if they dont meet

this requirement they can lose the contracts.

If the providers improve both the system and increase their services in a thirty per cent respect the

non-intervention level, they will receive an extra 1,000 payment throughout the additional sustained

work that they create.

All this measures provide good value for money of the tax payer. If the providers contract more

people who have more risk for keeping unemployed, the benefits that the government pay for them

are reduced. Therefore the program is a good measure to promote the work.

The government encourages suppliers to hire people who have more difficult to integrate in the

workplace. We can say that the Work Program is efficient, since payments are made once the

expected results for the program are achieved. Hence, this program aims to make people able to get

out of the recession, with the objective of economic recovery and the break with the benefit

dependency.

7Department for Work and Pensions (2003). The Work Programme.



However, although this measure is a good step to reach the lowest levels of unemployment, there

are many other areas related to the workplace to which they need a reform. Should be set a

series of objectives related to labour welfare must be priorities for reform.

Between these objectives should be important to create a less complex system, where people feel

certain and secure and can clearly see the rewards for working. The Government have to continue

promoting measures through more household work and the number of hours that they are worked.

The system must be seen as a fair system for both beneficiaries and taxpayers. It cannot afford any

possibility of fraud and should be finished with errors and delays in payments. Of course, the subsidy

system must be affordable.

Many of these objectives are gradually being achieved, through measures such as the Work

Programme or the Universal Credit, which allow a simply system for support unemployed.

To Start We Have to Determine What Unemployment Is

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