To What Extent Have Demographic Change and Employment/Unemployment Levels Affected the UK Economy Essay

To what extent have Demographic change and Employment/Unemployment levels affected the UK economy in recent years and how may they impact the economy in the future? This essay will look into the recent impact of the demographic situation of the UK economy and also the recent levels of UK employment, and how they have also impacted the economy. Then there is the impact that these variables may have or are expected to have in the future on the UK economy as well.

Demography is effectively the study of the characteristics of a population, and these characteristics all have an impact to some extent in the economy, so the management of maintaining these levels to a desired amount may seem to be instrumental to how an economy performs. Employment levels are also a key factor in how an economy performs, so the research I will partake in, should probably prove that these levels do in fact have a large impact on the UK economy and should continue to do so for the foreseeable future. Demographics as mentioned above are effectively the characteristics that define a countries population to some extent.

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Things measures are usually variables such as population size, the age of that population and the density in which that curtails, for example some areas being much more highly populated (crowded) than other more scarcely populated areas. The UK at the moment is demographically skewed towards an aging population as the working population is currently changing with an increase in the average age of employees (Redman and Wilkinson (2006)). There’s also a larger number of women and members of ethnic minority groups also forming todays workforce.

The Office for National Statistics (ONS) in their 2011 census, estimated the UK population at just over 62 million, which is the third biggest in the EU. This leads to large figures for the UK’s population density due to the high amount of people compared to the country’s relatively small land mass. The UK’s population density locally can be seen to be relatively existent, as one-third of the country’s population live in the South-East. These statistics would suggest that, the UK economy will need to focus on providing as many jobs to match demand in the highly populated areas to maybe prevent the occurrence of ghost towns.

There will also be a further need for housing not only now but in the future, as the UK population is estimated to grow by around 0. 6% per year based on the changes between 2001 and 2010. So economically this may provide employment for the building industry, however could be a burden on the balance of payment deficit, if housing is perhaps overbuilt. The UK population as mentioned above is also an aging one. This is effectively largely down to the post World War Two baby boom. These babies born around this time are all now at the retirement age and therefore are not necessarily eligible to work.

This economically leads to a few variables which may potentially be seen as undesirable. Firstly, there is the increased burden/cost on supplying health care, to support the aging population. There’s the potential burden on the government also, as more people may be receiving state pensions, so money is being drained by the public, perhaps extending the budget deficit. Also, there is the lack of supply for labour, as these people now retired, are unavailable for work, so other means may be required to rectify this situation. For example training regimes for young people and/or immigration.

Immigration is a controversial subject currently in the UK with the slight rise in right wing political parties such as the UK independence party (UKIP) and the British National Party (BNP). Immigration is frowned upon by many in the host country as it seems that ‘outsiders’ are taking jobs which they feel belong to the British workers. However, the demographics of the UK economy suggest that immigration may really be needed to resolve the problems which at the moment, show a deficiency in the labour supply, e. g. the aging population.

Even during a prolonged economic downturn, the UK will continue to need new migrants, to bring specialised skills, or to work in jobs that employers are unable to fill with British workers. It is argued that the immigrants who come over may be unskilled and may have little impact on supplying work for the UK economy, due to the high literacy rates of the UK compared to their counterparts, however Chiswick’s findings in the Human capital migration model, showed us that skilled immigrants will develop efficiency in the origin and the destination labour markets. ( Brettel and Hollifield (2008)).

Analysis of the same model this time from Borjas, George (1994) suggested that immigrants are more highly motivated than natives and also immigrants are ready to take risks, whilst also working harder and longer than natives, having with this a better economic integration in the host country. These findings again back up the case for immigration and that the process should also cause the UK economy in this instance no harm in pursuing immigration measures. With the UK population being an aging one, it can be assumed that immigration will continue to have an impact for the foreseeable future as it has done in recent years.

With immigration comes a combination of different cultures in the economy, which is another impact on the UK economy through Demographic Change. This can occur through different religions now being present, perhaps causing slight conflict and extra policing costs in some instances. This again showing another potential burden for the UK economy to consider both now, and in the long run. There may also be an impact to the UK economy with potential training put on by companies to minimalise inefficiency cultural differences may cause, for example language barriers and even work ethics.

Demographic Change is said to be measured through three main variables. These are Births, deaths and migration. In recent times, birth rates have dominated over death rates, this being largely down to improved states of the health care industry. This relation suggesting a gradual increase in the UK population year on year, leading to the natural increased demand for goods and services in the UK economy to be a constant, so there will continue to be an impact demographically on the economy for years to come as there has been in recent years.

Employment and Unemployment levels have and will always impact an economy to some extent. In recent years since the 1980’s there have been degrees of fluctuation in these levels. An example of the impact employment levels have on the economy is through benefit levels. Higher levels of unemployment will lead to higher amounts of benefits being paid out by the government. In recent years benefit levels have remained generous, which has led to the argument of are the levels too generous and meaning people aren’t prepared to work?

If this is correct to any extent, this will lead to a rise in unemployment levels, as workers may be unwilling to work for any pay which would only leave them perhaps marginally better off than they would be if they were just relying on the benefits system. There are currently debates ongoing about the benefit system as it is starting to be conceived that the current system is too open to exploitation. Iain Duncan Smith is a key advocate of this, and he is a backer of a new rejuvenated system, making it more ‘affordable to work’.

Higher employment levels are certainly encouraged looking at a Keynesian point of view. This breed of demand side economics would be of the belief that with more people earning in the economy then there is more disposable income around in the economy, thus leading to a circulation of wealth around the economy, leading to continued higher employment levels due to the demand and therefore also higher, sustainable economic growth.

This is backed to an extent by Okun’s Law (Prachowny (1993)) which suggests that for every 1% there is of unemployment above the ‘natural rate’, there is a predicted reduction of around 2-3% in gross domestic product (GDP). This effectively means that resources available are not being used efficiently so economic growth will therefore suffer, which would prove to have a large impact on an economy, so controlling these rates and not letting them spiral out of control is a key method to reducing a negative impact on the UK economy in the future also.

So Okun’s Law portrays the negative relationship between unemployment and GDP growth, and as GDP growth is an encouraged economic goal, there is evidence to say unemployment levels do have a large impact on the UK economy, so over recent years and in the future, these levels will and have been thoroughly assessed to ensure maximum optimality in the UK economy. High sustained unemployment levels may also lead to hysteresis. This may lead to a very negative impact on the economy, so unemployment levels again must be fought against in order to prevent this occurrence.

Hysteresis is the idea that a long spell of higher unemployment may lead to those unemployed, becoming used to the unemployed mind frame for example, and also losing out on their skills gradually by not being in employment. In recent years it could be argued that the benefits system is too generous as mentioned above, and that this may lead to some people being out of work for a prolonged period of time, potentially leading to the hysteresis effect.

The UK economy will try and maintain a desired level of unemployment. There’s the idea of there being a ‘Natural Rate of Unemployment’. When the economy operates at productive capacity, it will experience the natural rate of unemployment (Anderton, 2006). This idea would suggest that if an economy isn’t working closely to its natural rate of unemployment, then resources may be being used inefficiently.

This ideology has affected the UK economy in recent years and will in the future, as an economy is always looking to keep unemployment levels as low as possible to actively achieve sustainable economic growth. In the 1980’s there were periods of vast unemployment, with long queues famously being seen at job centres through this period of deindustrialisation which occurred in the Margaret Thatcher regime. Unemployment is usually the sign of a struggling economy, and in the 1990’s unemployment levels came crashing down and a slight time of prosperity was present.

This indicates the UK government were focused on employment levels so no more negative effects of unemployment could be witnessed for the UK economy. A key disadvantage of large levels of unemployment, is the lower amounts of taxation the government receives, which may lead to a reduction n government expenditure, or a need to borrow and extend the balance of payments deficit to maintain or expand on the current levels.

Direct taxes such as income tax will drop, as less people are working so there is less taxable income for the UK economy to receive. Also the higher unemployment rates may lead to less disposable income being present in the economy, so there would be less consumer spending. This may not only lead to further unemployment so more directly taxable income being lost, but less indirect taxes being claimed, as less spending leads to a reduction in taxes such as VAT.

This shows how with a high unemployment rate, the circular flow of income will have many different negative impacts on the UK economy, so the government will actively try to maintain desired employment levels. The UK government currently are introducing more training regimes and apprenticeships in order to boost long term sustainable employment. The scheme is a ?1bn plan to provide subsidised work and training placements will “provide hope” to thousands of young people.

The scheme will provide business with over ?2,000 subsidies if they take on an apprentice for six months. This scheme was drawn up just as youth unemployment (18-24 year olds) hit the 1 million people mark. This scheme shows that the UK are actively trying to reduce unemployment levels in the UK as it is having a negative impact on the UK economy. However, over recent years and even in the future, The UK economy will monitor the Demographic change situation and the Employment levels, but in recent years what has had the most impact on our economy is the global recession.

This was a massive shock to the global market and arguably has caused the high levels of unemployment we are seeing now. There are many variables an economy needs to take into account in order to successfully manage their economic situation; however a random shock to the market which cannot be predicted can throw an economy into disarray. In conclusion, the UK economy has been and will continue to be impacted by Demographic change and also by employment/unemployment levels.

The current demographics of the UK indicate a need for labour to come from abroad, to fulfil jobs which cannot currently be filled with native workers. And all research also indicates that employment levels are a key part of the economy, and the levels they are at, no matter how strong or weak will have a big impact on the economy. Going forward, controlling employment rates at a desired level seems vital in ensuring economic success, for example achieving economic growth and reducing the balance of payments deficit.

Also going forward, there may well be an aim in attempting to improve the UK’s demographic situation, by gaining a greater supply of eligible workers, be this by producing children incentives or even extending the retirement age. The UK economy can be impacted in many instances, and in recent years it seems that the regimes in charge have done admirably in keeping the unemployment levels down, however what brings the situation into turmoil, is a random shock happening to the global market and leading onto a global recession.

So to sum up in recent years, demographic change and employment/unemployment rates have impacted on the UK economy, and with the current economic situation the two variables will seemingly have a great impact in years to come as well.

Bibliography

Anderton, A (2006). Economics. 4th ed. Cambridge: Causeway Press. BBC Website. (2010). Benefits system overhaul ‘to make work pay’. Available: http://www. bbc. co. uk/news/uk-politics-11728546. Last accessed 21st May 2012. BBC Website. (2011).

Clegg: ?1bn scheme will ‘provide hope’ to young jobless. Available: http://www. bbc. co. uk/news/uk-politics-15878796. Last accessed 21st may 2012. Brettel and Hollifield (2008) Migration Theory. Talking Across Disciplines Routledge, NewYork. Office of National Statistics. (2011). annual mid-year population estimates 2010. Available: http://www. ons. gov. uk/ons/rel/pop-estimate/population-estimates-for-uk–england-and-wales–scotland-and-northern-ireland/mid-2010-population-estimates/index. html. Last accessed 20th May 2012.

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