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Relationship Between Economic Growth Rate And Unemployment U.K. Economy

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Introduction (Background)

Economic growth and unemployment are two key factors of macroeconomics and two significant determinants of economic progress of an economy. These two macroeconomic variables which are Unemployment and economic growth are negatively related to each other. That is, if the rate of unemployment increases, the total production of the economy will fall which leads to a fall in economic progress. On the other hand, if there is a fall in economic growth, then there will be a decline in the job opportunities and a cut-off of labour-force, which will again leads to an increase in the unemployment rate. Therefore, for any country, there is a close relationship between economic growth and unemployment rate (Boyes, 2015).

Aims and Objectives:

Objectives-

The main objective of this research paper:-

  • To collect and study the statistical data of the rate of unemployment and economic growth rate in the U.K. economy over the last decade (i.e. 2005-2015).
  • To analyze the relationship between the rate of unemployment and the economic growth rate in the U.K. economy.

Aims-

The aim of this study is-

  • To determine the relationship between the rate of unemployment and the economic growth rate in the U.K. economy.

Research Questions:

In this research paper, the focus is given on the following question:-

  • Is there any relationship between the rate of unemployment and economic growth in the U.K. economy?

Hypothesis:

Null hypothesis-

H0:- ‘The rate of unemployment and economic growth in the U.K. economy is negatively related to each other’.

Alternative Hypothesis-

H1:- ‘The rate of unemployment and economic growth in the U.K. economy is not negatively related to each other’.

Literature Review:

Unemployment is a situation, where a number of working age people want to work and is searching for a job, but, are not able to get a job due to lack of job opportunities. The rate of unemployment of a country can be measured by dividing the unemployed number of people by the total workforce of the country, where the total workforce refers to the people who are willing to work.

To analyze the relationship between unemployment and economic growth, the concept of Okun’s Law can be used. This law is based on the statistical studies which show the change in unemployment growth rate due to the change in economic growth over a particular time period. According to Okun, there is a negative relationship between the unemployment rate and economic growth (Krugman, 2015).

There are different effects of unemployment on an economy, such as:-

Increasing the financial cost of the economy-

Due to unemployment, the government, as well as the nation, suffers due to low productivity and the financial crisis. The government of most of the developed countries like the U.K. provides unemployment benefit to unemployed people. Hence, the government has to pay the greater unemployment benefits for the unemployed people in the phase of the high unemployment rate. This raises government spending, though there will be a fall in the government earning due to the decline in the production for the high unemployment rate.

Reducing spending power of the unemployed-

For the shortage of finance in the hands of the unemployed people, they greatly suffered from the low purchasing power which badly affected the economy.

Reducing the spending power of the employed-

Not only the unemployed people but also the employed people are the worst sufferers of the high unemployment rate due to the high rate of taxes and the insecurity about their own work. This leads to low spending from the side of the employed people which has an adverse effect on the economic growth (Journal of Political Economy, 2015).

Recession-

The increase in the unemployment rate has a bad effect on several factors of the economy like decreasing per capita income, increasing in health-cost and poverty, bad quality of standards of living and health-care facilities, etc.

Hence, from the year 2005 to 2012, with the decline in economic growth rate, in the U.K. economy, there was an increase in the rate of unemployment and with the continuous increase in economic growth rate the unemployment rate has declined over the period 2013-15 (Tradingeconomics.com, 2015). That means, in the case of the U.K. economy, there is a negative relationship between the unemployment rate and economic growth, which follows the Okun’s Law of unemployment and economic growth rate.

Research Methodology:

In this paper to test the hypothesis, the deductive method has been used in analyzing the secondary data of the annual GDP growth rate, consumers’ spending and real interest rate of U.K. In order to analyse the relationship between these factors, secondary data has been collected from the official data sources of the U.K. economy and those data has been used for establishing the relationship between the factors.

References

Boyes, W. (2015). Macroeconomics. [Place of publication not identified]: Cengage Learning.

Data.worldbank.org, (2015). Unemployment, total (% of total labor force) (modeled ILO estimate) | Data | Table. [online] Available at: https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?page=1 [Accessed 15 Jul. 2015].

Data.worldbank.org, (2015). Unemployment, total (% of total labor force) (modeled ILO estimate) | Data | Table. [online] Available at: https://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?page=1 [Accessed 15 Jul. 2015].

Journal of Political Economy. (2015). Journal of Political Economy, 123(1), p.Inside Back Cov-Inside Back Cov.

King, J. (2014). The Handbook of the Political Economy of Financial Crises. Review of Political Economy, 27(1), pp.97-102.

Krugman, P. (2015). Macroeconomics. [Place of publication not identified]: Worth Pub.

Tradingeconomics.com, (2015). United Kingdom GDP Annual Growth Rate | 1956-2015 | Data | Chart | Calendar. [online] Available at: https://www.tradingeconomics.com/united-kingdom/gdp-growth-annual [Accessed 15 Jul. 2015].

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