Macroeconomics, as we all know, deals with economic growth and unemployment that are two significant determinants of the progress of an economy. These two macroeconomic variables 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 lead to an increase in the unemployment rate. To understand this relationship further, let us have a look at these elements separately.
What Is Economic Growth?
Economic growth refers to the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is measured as the percent rate of increase in real gross domestic product, or real GDP. Three factors drive economic growth:
- Discovery of natural resources
- Accumulation of capital stock
- Increases in labor inputs, such as workers or hours worked
- Human capital
- Technological advancement
The nation under consideration here is the UK. The economy there is considered to be highly developed and market-oriented. UK is ranked the sixth-largest national economy in the world measured by nominal gross domestic product (GDP), ninth-largest by purchasing power parity (PPP), and twenty second-largest by GDP per capita, comprising 3.3% of world GDP.
Now, let's talk about unemployment.
What Is Unemployment, And How Does It Occur?
Unemployment or joblessness is a situation where physically abled people fail to find a job for themselves. There are a lot of factors that drive individuals toward unemployment. The major factors causing unemployment are as follows:
- Individuals voluntarily leaving the workforce
- New workers entering the workforce
- Advances in technology
- Job outsourcing
- Fewer jobs while there are more applicants
- Lower consumer demands
So, these were the elements responsible for joblessness or unemployment. This phenomenon has adverse effects on the economy of a nation. Here's a list of the significant effects that an economy faces when unemployment strikes in:
- Boosting the financial cost of the economy:
Unemployment leads to low productivity and financial crisis which in turn causes a nation to suffer. The government of most of developed countries like the U.K. provides unemployment benefit to unemployed people. Hence, the government is supposed to pay greater unemployment benefits for unemployed people when the unemployment rate is high. This leads to a fall in government earning due to the decline in production for the high unemployment rate.
- Shrinking the spending power of the unemployed and 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 work. This leads to low spending from the side of the employed people, which harms the economic growth.
This is the ultimate consequence of unemployment. An increased unemployment rate has an adverse effect on several factors of the economy like decreasing per capita income, growing in health-cost and poverty, lousy quality of standards of living and health-care facilities, etc.
Considering the case of the UK, unemployment is measured by the Office for National Statistics. As per the latest surveys, the number of people in employment in the UK increased by 32,000 to a record high of 32.75 million, until April 2019. Additionally, the unemployment rate for women dropped to a joint-record low of 3.7%. As a result of decreased unemployment, absolute poverty is out of sight, and poverty has remained stable.
As per the latest inflation report published by Bank Of England, it expected economic growth to remain subdued. Several forecasters have pointed to EU exit uncertainty as a factor now affecting the economy. To sum it all, 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.
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