Why has Unemployment and Inflation Fallen in the UK
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In the past 15 years, unemployment has fallen from a peak of 3 million to
under 900,000. The claimant count shows that the % unemployed is close to 3% a
big drop from 10% in 1992. The Labour Force Survey also shows a drop in
unemployment, although it does shows a slightly higher rate of unemployment
(4.5%). Inflation has also fallen in the UK. CPI inflation is currently 2.1%
very close to the government's target of 2%. This low inflation rate is in
contrast to the 70s and 80s when inflation was often in double figures
Reasons for the fall in Unemployment
1. Long Period of Economic Growth.
The UK has experienced the longest period of economic growth on record.
Growth has been close to the long run trend rate of 2.5%, this stable growth has
enabled firms to expand and create employment. It is also important that the
growth has been sustainable. The UK has largely avoided the boom and bust
economic cycles which characterised the 1970s and 1980s.
2. Flexible Labour Markets
There has been increased labour market flexibility which has enabled some
workers to get a job. For example, there are more part time and temporary jobs,
these flexible job contracts have encouraged firms to offer more employment;
however, it is also been suggested that the employment created is less
permanent. Proponents of the flexible labour market argue that higher
unemployment in France and Spain show that flexible labour markets are important
for keeping inflation low
3. Decline in Structural Unemployment
The lower unemployment in the UK is partly due to improvements in education
and training and geographical immobility. Better training has held fill up
labour shortages. The New Deal has also played a role in encouraging and
motivating people to get back to work. It is hard to quantify how much this has
actually reduced unemployment but it is likely to be significant.
Why is Inflation Also Low
Quite often a fall in unemployment leads to a rise in inflation. This is what
Phillips curve analysis predicts. However, the UK economy has enabled a fall in
unemployment without causing inflation. This is due to several factors.
1. The growth has been sustainable.
The MPC have avoided an economic boom. Aggregated Demand has increased at a
similar rate to Aggregate Supply and this has enabled inflation to be kept under
control.
2. Global Inflation is low.
The UK's low inflation has been helped by low global inflation. Until
recently, commodity prices have not been increasing. But, the main factor is the
downward pressure on prices from developing countries like China. Helped by
better technology and low labour costs many goods, especially electronic goods,
are experiencing falling prices.
More on Inflation Predictions in the UK
Forecast for the Future.
The slowdown in house prices and global growth could cause a slowdown in
growth. At the moment, the prospects for a recession are limited as the economy
is still growing reasonably well; the MPC have also room to cut interest rates
if necessary, to boost aggregate demand.
If the economy slows down, inflationary pressures should fall. Although quite
recently the MPC warned of rising cost push inflation from energy prices and
food prices. This could lead to both higher inflation and higher unemployment.
More on:
Inflation Predictions in the UK
About the Author
Richard Pettinger studied Politics and Economics at Lady Margaret Hall,
Oxford University. He now works as an economics teacher in Oxford. He enjoys
writing essays on Economic and he edits an Economics Blog focused on UK and US
economies:
http://www.economicshelp.org/econ.html
