EC566 Macroeconomics for Business: UK Unemployment and Policy Analysis

This essay provides a comprehensive analysis of the UK's unemployment rate, examining its historical context and recent trends, including the lowest levels since the 1970s. It explores the relationship between unemployment and inflation through the Phillips curve, highlighting the trade-off between these economic indicators. The essay then delves into relevant macroeconomic policies, distinguishing between demand-side and supply-side approaches to address unemployment. It discusses policies such as apprenticeship schemes to improve labor market efficiency and boost aggregate demand through fiscal stimulus and monetary policy. The essay also examines the roles of short-run and long-run aggregate supply curves, and the aggregate demand curve in determining the equilibrium price level and output, and the impact of demand increases. Finally, the essay explores the objectives and instruments of monetary policy, including quantitative easing, used by the Bank of England to address financial crises and stabilize the economy.

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The Philips curve shows the relationship between the rate of inflation and the
unemployment rate. According to the Phillips curve, there is an inverse relationship between
unemployment and inflation (Lumen, n.d.). However, the relationship is non-linear. In the short-
run, the Philips curve traces an L-shape where the rate of unemployment is in the x-axis and rate
of inflation on the y-axis. The Phillips curve is a trade-off between inflation and unemployment.
The increase of one lead to a decrease in the other. In the above graph, the economy can either
record a 3% in unemployment at the cost of 6% inflation, or increase unemployment to 5%
aiming to reduce inflation levels to 2%.
Phillips curve is also closely related to aggregate demand. The Phillips curve displays a
trade-off between inflation rates and unemployment where high unemployment leads to low
inflation and low unemployment leads to high inflation. Thus, the Phillips curve and aggregate
demand have common similarities. The Phillips curve is the nexus between inflation which
affects the price level component of total demand, and unemployment relies on the output from
aggregate demand. However, it is not far-fetched to assert that the Phillips curve and aggregate
demand are closely associated.

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UK’s unemployment rate edged down to less than 4% in the three months as reported
from January 2019. This has been said as the lowest level since the 1974-1975 of November and
January phase and was slightly below the anticipation of the market of 4% (Trading Economics,
2019). The figures for the unemployed dropped by 35,000 within the first quarter whereas
employment increased by 222000 and this has been reported as the most significant rise since
November 2015 (Trading Economics, 2019). It is estimated that there are more than 1.34 million
unemployed individuals and 35000 less than what was recorded from August to October of 2018
and 112,000 less than what was reported in 2017. It is historic that there have not been fewer
unemployed individuals in the UK since the last quarter of 1975 (Trading Economics, 2019).
It was approximated that more than 30 million people were employed and this was more by
222000 than what was recorded in the last quarter of 2018 and more by 473,000 than in 2017.
This was the most significant quarterly rise ever recorded following the last quarter of 2015. The
rate of employment was estimated at 76%, and this was marked as the highest comparable
estimate compared to the one recorded since 1971 (Trading Economics, 2019).

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However, the most recent indications that the weekly earnings on average for UK employees on
a nominal basis rose by 3.4% with the inclusion of bonuses compared to 2017. Also, it was
reported that the weekly earnings on average of real basis for UK employees rose by 1.4% with
the inclusion of bonuses compared to 2017.
Relevant macroeconomic policies to solve unemployment in the UK
It is imperative to draw a line of distinction between demand-side and supply-side
policies applicable to improve the efficiency of the labor market in suiting individual to available
jobs.
Immobility has been identified as the cause of structural unemployment and thus
reducing occupational mobility would be crucial. With policies such as apprenticeship schemes
in place, the unemployed will be equipped with new skills needed to seek fresh employment and
to improve the incentives to seek work. It has been reported that in 2013, more than 500,000
individuals began apprenticeships in the UK (Riley, 2018). For many decades, the poor quality
with regards to workplace training has been in the limelight as there was evidence of constant
skills-gap in the UK. Based on a report that was published in 2011, the trade union asserted that
11% of the British adults lacked the requisite qualifications. For instance, in some regions such
as parts of Glasgow and Birmingham recorded more than a third of individuals of working age
lacked qualifications.
Bridge the gap in the geographical immobility of labor
Many individuals have the required package of skills to seek fresh work but some factors
such as expensive house prices and rent for new houses, family and social fabric and regional
disparities in the cost of living make it hard and almost impossible to change location in seeking
a new job (Riley, 2018). Reports from economist have pointed out that consistent low level of

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house-construction as a primary element limiting labor mobility and the possibilities of finding
new employment opportunities.
Boost aggregate demand
The Keynesian-mode stimulus is an effective policy during a recession. It may entail
increases in government spending or boosting disposable income by lowering the taxes. The
fiscal stimulus package where the government employs fiscal policy in creating new employment
opportunities in what economists refer to as shovel-ready opportunities (Riley, 2018). Such
employment opportunities entail construction projects that are labor intensive. The aim is that
extra spending on road projects, housing, and any other infrastructure projects will create a
robust multiplier impact on output, incomes and employment opportunities.
Monetary policy
Monetary policy entails using interest rates and other instruments of monetary policy to
influence the levels regarding consumer spending and aggregate demand (Tejvan, 2019).
Specifically, the role of monetary policy is directed at stabilizing the economic cycle while
maintaining inflation low and avoiding recessions.
Objectives of monetary policy
One is to keep inflation at low levels. For instance, the UK has set its target at CPI 2%
(Tejvan, 2019). The art of keeping inflation at bay has been identified as an important factor in
driving higher investment in the long-run. Monetary policy also aims at ensuring a sustainable
economic growth rate while keeping the rate of unemployment low.
It is during the credit crunch evidenced in the 2008-2009 financial crisis that the Bank of
England employed quantitative easing as a component of the monetary policy (Riley, 2018). This
entailed generating money electronically to purchase assets such as bonds from commercial

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banks. Such a measure is thought that by purchasing illiquid assets, the money supply will
increase thus escaping deflationary pressures.
Short-run and long-run supply curves and the aggregate demand curve
The short-run supply curve slopes upward since businesses supply more as a result of
price increases (Sparknotes, 2019). Firms are limited during the short-run as they are unable to
expand their premises or purchase new machinery to service the increased supply needs.
The long-run aggregate supply curve is a vertical line and demonstrates the maturity of the
market. In the long-run firms have ample time enabling them to respond to market conditions
and are insensitive to prices. Aggregate demand curve on the hand represents the total output
demanded by the economy based on different prices.
Equilibrium price level and output are determined by the intersection of the short-run, long-run
aggregate supply curve and the aggregate demand curve.

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When the economy is at its long-run equilibrium and demand increases would shift the aggregate
demand to the right that is from A to B leading to increased output and reduced price as shown in
the graph below.

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References
Lumen, n.d. The Relationship Between Inflation and Unemployment-The Phillips curve. [Online]
Available at: https://courses.lumenlearning.com/boundless-economics/chapter/the-relationship-
between-inflation-and-unemployment/
[Accessed 4 April 2018].
Riley, G., 2018. Unemployment - Policies to Reduce Unemployment. [Online]
Available at: https://www.tutor2u.net/economics/reference/unemployment-policies-to-reduce-
unemployment
[Accessed 1 April 2019].
Sparknotes, 2019. Aggregate Supply and Aggregate Demand. [Online]
Available at: https://www.sparknotes.com/economics/macro/aggregatesupply/section3/
[Accessed 1 April 2019].
Tejvan, 2019. UK Monetary Policy. [Online]
Available at: https://www.economicshelp.org/macroeconomics/monetary-policy/
[Accessed 1 April 2019].
Trading Economics, 2019. United Kingdom Unemployment Rate. [Online]
Available at: https://tradingeconomics.com/united-kingdom/unemployment-rate
[Accessed 1 March 2018].