The UK labour market

Last Updated: 27 Jul 2020
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The UK labour market has exhibited substantial alterations in the main indicators of its character and thereby evinced at very significant changes during the final quarter of the twentieth century. Although for the preceding period of the 1980s, unemployment as measured by the ILO definition, reduced to 7. 2% in 1989 from 11. 2% in 1986, it was coupled with rising inflation, and the inflation as measured by the GDP deflator rose to 7. 1% from 3. 5% (Nickel, 2001).

For the period of the 1990s however, the fall in unemployment has been by higher percentage points and the striking fact is that for the same period, there has been an observed decline in inflation as well (Nickel, 2001). There has been a decline in unemployment from 10. 3% in 1993 to 5. 5% in 2000 and this positive indication for the economy looks even brighter when one considers the fact that inflation over the same period has fallen to 1. 7 by a whole percentage point (Nickel, 2001).

It is not the steady decline in unemployment that makes this period stand out as that has been a natural extension of the previous trends but rather the fact that unemployment as well as inflation, two very important macroeconomic indicators have been falling at the same time marks a significant break in trend. In 1997, the ‘new deal’ was introduced and the indicators have been performing very well since then. There have been other significant changes in important labour market indicators as well. For example, the number of economically inactive reached 2.

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3 million in 1998 which is striking particularly if we note that this number was about 400 thousand back in 1988 (Nickel, 2001). The proportion of trade union members among employees has dropped from above 50 per cent in 1979 to below 30 per cent overall and below 20 per cent in the private sector (Nickel, 2001). The objective of the present endeavour is to review these changes to analyse their true natures and implications and to identify and explore into the multifaceted causalities responsible for them to finally enable a perception of this new dynamism evident in the labour market of UK.

In pursuit, we shall first take a look at the various broad macroeconomic indicators and attempt to present the results in context of the corresponding policy frameworks. Then we shall move on to explore the various microeconomic dimensions of the changed environment as evident in certain indicators that also allow enhanced perception of the extent of social welfare improvements or deteriorations as have occurred through this period of considerably changing labour market environments that have strong spill over effects on the entire population of the economy.

Finally we shall conclude by reviewing our discussion to enable a final comment upon the degree or nature of success achieved in the UK labour market in terms of fulfilment of objectives. From a macroeconomic perspective, the labour market in the UK economy has exhibited a superior performance compared to most OECD countries since the mid 1990s. It has superseded not only itself historically, but also achieved greater heights compared to most G7 nations as well.

UK unemployment peaked at 1993, reaching about 10 per cent according to the ILO definition of the terms (TRESOR-ECONOMICS, 2007). But since then it has been ably brought down with the pace of its fall intensified since 1997. The unemployment rate reached its minimum of 4. 7 per cent in 2005. Not only has unemployment gone on falling, as mentioned earlier, the extent of this enviable performance in terms of employment has been further augmented by remarkably low and further falling inflation.

Inflation expectations have also been stable among the most important wage bargainers (Nickell & Quintini, 2002). The growth in real wages has also been quite high implying the achievement of the macroeconomic stability has not entailed reductions in living standards for the population (Nickell & Quintini, 2002). Presently, the UK has one of the strongest labour markets compared to other OECD nations. According to the OECD outlook (2007), the employment rates of UK are lower only than those of Canada among the OECD nations (Diagram 2).

The UK labour market has achieved high employment across most groups. The extent of the success becomes apparent if we note that the employment rates of the different groups in the UK labour market are higher than the corresponding OECD averages for all groups apart from the group of unskilled workers, and in this case the shortfall is by a very small amount (OECD Outlook, 2007). This has been shown in the diagram below.

The degree of success achieved by the UK in its labour market becomes even more evident when we consider that this remarkable rise in employment which has been achieved over a period during which the inflationary pressure has been stably maintained at low levels and more importantly there has been significantly stable growth in real wages, has come with the economy spending a relatively small amount of its GDP for labour market programmes. The average UK spending in this pursuit has been hovering around 0. 38 percent of the GDP which is substantially low compared to most developed nations (OECD, 2007).

The continuing decline of the unemployment rates over such long interval along with stable and low inflation rates does indicate a reduction in the equilibrium level of unemployment . The fore-mentioned falling unemployment and inflation rates have been maintained through high values of the exchange rate (Nickell & Quintini, 2002). The falling inflation has come at the cost of a balance of payment deficit. Nickell & Quintini, (2002), find the equilibrium rate of unemployment to be on the decline since the mid 1980s.

They identify two main causes behind such a decline. First, with the considerable decline in union coverage, there has been a shift of power in bargaining away from the workers resulting in the role of the union becoming lesser “adversarial”. Secondly, there has been a steady decline in unemployment benefits in the period under question and the focus of the entire benefit system has shifted more towards providing work for the unemployed. The reductions in employment taxes also have had some minor contributions in causing this reduction in the equilibrium rate.

The changes institutional changes brought about since 1997, like the have been found to not have had very significant contributions to the declining equilibrium rate of unemployment (Nickell & Quintini, 2002). The authors believe “the introduction of the National Minimum Wage and the new procedure for union recognition are unlikely to generate any significant increases in unemployment and the same is true of the significant increases in the financial burdens on UK business because of new regulations on working time, part-time workers, parental leave and the like.

Pointing the other way, the New Deals and the increasing rigour of competition policy will probably only have a small positive impact on employment over the medium term”. Although the unemployment rates along with inflationary pressure had been brought down to comfortable levels by 1997, a deeper exploration of the UK labour market statistics reveals worsening of a certain key micro economic imbalance of the economy.

While the number of the unemployed went down, the number of people under inactivity benefits, definable as people who depended upon the state but were excluded from participating in the labour market, rose sharply. Particularly striking is the fact that there has been a substantial rise in the percentage of inactive men (table 1). The rise in inactivity has been particularly striking among unskilled men . The main cause behind this was the rapid decline in the unskilled male labour demand that fell significantly faster than the supply due to steady rises in the educational levels and standards (Gregg & Wadsworth, 1999).

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The UK labour market. (2018, Oct 04). Retrieved from

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