Unemployment and Vacancies in Britain

Abstract

Unemployment Christopher Pissarides This paper uses data on unemployment flows and job vacancies to shed light on the phenomenal rise of unemployment in Britain, from under 3% in the 1960s to over 15% (male) unemployment in the 1980s. It finds that most of the rise is due to a fall in the demand for labour. A more expansionary fiscal policy and improved international competitiveness would have ameliorated this fall. Some of the fall, however, can also be attributed to supply pressure, which stopped wages from falling fast enough. Social security and a more relaxed attitude by the state in the provision of unemployment and supplementary benefits also contributed to the rise in unemployment, by making workers more choosey. The paper investigates whether it is possible for any given set of underlying factors to give rise to more than one equilibrium unemployment rate. If so, a temporary stimulus might release the economy from a low-level equilibrium. However the conditions necessary for this do not appear to hold in practice. Thus fiscal and monetary policy can permanently affect unemployment only if they can permanently alter aggregate demand. Microeconomic policy, like marginal employment subsidies, can, however, have a permanent effect on unemployment and the paper investigates whether there are any grounds for wishing to use such policy tools to alter the free-market equilibrium unemployment rate. There is evidence that the allocation of workers to jobs is done more efficiently at a fairly high level of overall labour demand. It follows that, unless job vacancies exceed unemployment, job creating policy measures will be beneficial.