This article discusses the increase in unemployment in the United Kingdom because of the COVID-19 Pandemic and the government’s approach to combat this increase. Unemployment is the number of people of working age who are willing to and available for work, and actively seeking employment. COVID-19 has resulted in a significant decrease in aggregate demand, which has caused the highest unemployment rate in the UK since four years.
Figure 1 depicts the decrease in aggregate demand caused by COVID-19 in the UK. As a result of lockdown rules, closing down of industries such as travel (and the resultant unemployment) and economic uncertainty regarding the future, consumer spending and private investment have substantially decreased, thereby decreasing aggregate demand from AD1 to AD2. As real output falls from Y1 to Y2, firms are likely to reduce production and production costs, which will lead to lay-off of workers and increased unemployment, creating a larger deflationary gap as shown in the diagram. Since the unemployment is brought about by the decrease in aggregate demand, it can be considered to be cyclical.
Unemployment creates a deterioration of economic well being, which is the extent to which optimal prosperity and living standards for all can be achieved as it reduces the ability of individuals to meet basic needs and compromises their ability to be financially secure and maintain adequate income levels. In addition, it can also create social problems such as increased crime and suicide rates, as well as overall economic inefficiency.
The UK government implemented a furlough - paying 80% of the salaries of workers who would have been unemployed - to improve economic well being as the increased income will improve their ability to meet basic needs and make economic choices while enabling maintenance of financial and income stability. The furlough will potentially increase aggregate demand by increasing current government expenditure, which is short term spending on factors of production (including wages). The prevention of unemployment and payment of wages under furlough may potentially maintain consumer spending, especially on essential goods such as food and clothing. In Figure 2, the aggregate demand - which had fallen to AD2 - increases to AD3 because of the furlough. This increases output from Y2 to Y3 and as a result, decreases unemployment. The government is also planning against cutting a 20 pound increase in universal credits (benefits given to low income or jobless members of the labour force). This will further increase consumer spending and therefore aggregate demand because of an increased consumer confidence and certainty. Thus, through these expansionary fiscal policies the government may increase aggregate demand, thereby reducing cyclical unemployment.
However, there may be a tradeoff between inflation and unemployment depending on the inflationary pressure on price level. This means that as one variable increases, the other will decrease. In Figure 2, though unemployment is decreasing, price level may increase from PL2 to PL3, thus potentially showing inflation. This inflation might be detrimental in the long term as the loss of purchasing power of income and reduced international competitiveness and economic growth might worsen living standards and negatively impact stakeholders.
The government is undertaking a significant opportunity cost because of the furlough by foregoing spending on sectors like medical infrastructure and vaccinations, but it is a necessary short term approach to combat the severe economic situation of the unemployed during COVID-19. Although the furlough is necessary in the short term, in the long term the aforementioned policies can hinder the unemployment rate as the unemployed have less of an incentive to find employment as they may grow dependent on benefits as income. An advantage of the furlough is that it seems to have passed quickly, reducing the time lags that usually occur due to lengthy legislative processes. Producers will incur lower production costs as the government is offering subsidies towards labour wages. This is likely to result in increased profits, as producer revenue will further exceed costs, but is unlikely to be significant as during COVID-19, consumers are unlikely to spend more on non-essential goods.
An alternative approach is to simply increase the universal credits (as defined above) mentioned in the article (which the government is considering maintaining) rather than implement a countrywide furlough. This will enable improvement of economic well being in the same way as the furlough and will reduce the possibility of inequality based on wage levels, as unlike the furlough - which pays 80% of the worker’s salaries and may vary based on the amount earned - the universal credit scheme is a uniform and equal method of providing for the unemployed and maintaining their economic health.
In conclusion, although the furlough scheme may be disadvantageous in the long term, it is a strong solution to reduce unemployment in the short term and therefore prevents a deterioration of economic well being.
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