The report provides information on the rise in the UK unemployment rate caused by the COVID-19 pandemic. The study is important as the current situation could profoundly impact the labor market, demand, and economic activity. The report concludes that a demand shock, combined with economic uncertainty, can lead to a slower return to pre-pandemic unemployment levels in the country in comparison to previous recessions.
The COVID-19 pandemic has hit many of the world’s economies, including in terms of population employment. The quarantine measures have affected the income of manufacturing and selling industries, companies, and entrepreneurs, which also impacts workers. The UK labor market in the 21st century was one of the strongest in the world. However, in the second quarter of 2020, the number of unemployed people began to increase, and the country’s unemployment rate started to rise (“How persistent will the impact,” 2020). During the Great Recession in the UK in 2008, the unemployment rate was 5.2% (Bell and Blanchflower, 2020, p. 54). The decline below 5% did not occur further until October 2016 (Bell and Blanchflower, 2020, p. 54). From 2008 to 2015, there was an active increase in unemployment up to 10%, as shown in the graph below.
Since 2016, there has been a continuous declining trend in the unemployment rate in the UK. The level has returned to pre-crisis levels in the seven years since the last two recessions due to several factors (“How persistent will the impact,” 2020). First, after the financial crisis, there were fewer firms that were also uncertain about the future and limited in hiring. Second, a long-term lack of work makes it challenging to find a suitable job for an employee, which increases the time to fill existing vacancies. Thus, such a long economic recovery is caused by the factors described.
The COVID-19 pandemic and the associated economic shocks are of a different nature than past crises, which may affect the speed of unemployment rates recovery. However, the uncertainty surrounding recruitment and job search due to political moves and distancing measures during the pandemic is higher. Moreover, different sectors of the economy were affected in distinct ways, which can create inconsistencies between them and complicate hiring and job search. Thus, recovery of pre-pandemic unemployment rates may take longer than expected.
The choice of the topic for the report is due to the widespread negative influence of the pandemic on the unemployment rate in the countries of the world. However, this is especially true for the UK, as the country has shown a steady decline in rates over the past years. Moreover, there is information that the country’s labor market was close to full employment by the beginning of 2020 (Bell and Blanchflower, 2020). However, statistics and studies have denied the possibility of such a condition (Bell and Blanchflower, 2020). Thus, the analysis of previous recessions and forecasts regarding the present crisis of the labor market in the country is of research interest. Despite relatively rapid stabilization after past recessions, the current rise in unemployment rates may be long-term.
The pandemic and quarantine have had a profound impact on the UK economy, particularly on the labor market and the unemployment rate. King (2020, para. 2) reports that the number of redundancies that occurred from August to October 2020 reaches 370 thousand. Moreover, the number of unemployed people in the country is expected to rise to 2.6 million by mid-2021 (King, 2020, para. 8). According to various estimates, the unemployment rate in April and July 2021 will reach 7.7% (King, 2020, para. 9). Recent statistics confirm such predictions based on the count of unemployment claims. The growing number of complaints related to unemployment is a significant indicator of a massive increase in its rate (Şahin, Tasci, and Yan, 2020). According to the data, in some areas of the UK, the number of unemployed reaches 9.7% (“UK unemployment tracker,” 2020). The figure below shows the percentage of complaints among the working-age population for different cities in the country.
From the point of view of the economic theory, the main concept which is applied to the analyzed process is uncertainty. First of all, the pandemic is causing heightened uncertainty, as, after the economic crisis, people cannot predict economic behavior. Since both demand and supply decline, a combination of a demand shock and uncertainty shock occurs, resulting in a flatter Phillips curve between inflation and unemployment. Thus, increased uncertainty also leads to a decrease in economic activity, exacerbating the situation. However, the literature suggests that uncertainty can also lead to increased savings and, as a consequence, a subsequent investment boom (Basu and Bundick, 2017). However, the counterargument, in this case, is a potential decrease in demand for goods, which will divert attention from investment and lead to a decline in economic activity (Basu and Bundick, 2017). The graph below illustrates the described effect of a flatter Phillips curve in a combination of demand shock and uncertainty.
Thus, given the effect of uncertainty and its impact on inflation through supply and demand, it can be concluded that hiring will be suppressed for a long time. This is due to the fact that the relationship between the employee and the employer is long-term and involves economic risk (Hall, 2017). In particular, the shock of uncertainty causes an increase in risk premia, which leads to a drop in the company’s value, while a regular shock in demand does not have such an effect (Basu and Bundick, 2017). Thus, uncertainty plays a key role in shaping the picture of unemployment in the UK after the pandemic. Previous recessions were not aggravated by this factor, which made them relatively stable. However, the current rise in inflation and unemployment due to lower demand may prove to be long-term.
As noted earlier, the impact of the pandemic on various sectors of the economy looks different. First of all, the hospitality, transportation, and manufacturing industries have suffered. However, there are those whose incomes have increased compared to the pre-pandemic period, such as health and social work or public administration. However, despite the rise in income levels, workers are still under redundancies. Notably, most at-risk workers earn less than £10 an hour and are low-skilled (Allas, Canal, and Hunt, 2020). The graph below illustrates the number of people unemployed in 2019 who are at risk at the moment for different sectors.
The UK government is taking many measures to stabilize the economic situation in the country. In particular, with regard to the employment of the population, these measures include the Job Retention Scheme, aimed at helping both employers and workers who have lost their jobs. The Kickstart Scheme aims to restore employment levels, facilitate the search of a job, and cover salary costs for the employer in the first six months. Apprentice and Traineeship schemes encourage the recruitment of young professionals; Statutory Sick Pay offers financial support for small businesses (“A plan for jobs,” 2020). Despite the variety of measures, the government should pay special attention to managing economic expectations due to increased uncertainty. Particularly, by limiting expected uncertainty in relation to future employment and consumption, public policy can restrict recessionary impulses due to rising risk premia and falling demand.
Available statistical information was used to compile the presented report. The literature investigating the impact of the COVID-19 pandemic on unemployment in the UK was also reviewed. The main conclusion is that the current increase in the unemployment rate caused by the pandemic is of a different nature than during the periods of previous recessions. The main factor is economic uncertainty, which leads to reduced demand and economic activity. In the long term, the situation could lead to a protracted labor market crisis. This conclusion correlates with established economic theories of demand versus inflation and uncertainty, as illustrated by the Phillips curve. As noted, the literature also emphasizes that the current effect can have a long-term impact given the nature of the employee-employer relationship. Thus, the report provides an overview of the impact of the COVID-19 pandemic on the unemployment rate in the UK and offers an analysis of the future development of the situation.
Recommendations on the topic presented will consist of a thorough collection of statistics concerning the topic. Despite the fact that there is enough detailed information on unemployment in the UK, the data obtained during the pandemic is not precise enough to draw long-term conclusions. Moreover, given the complexity of the factors involved in the process, such as uncertainty and economic inactivity, it is rather difficult to make predictions. Therefore, for future research, more specific time intervals should be considered, and the dynamics should be investigated in shorter intervals.
Allas, T., Canal, M. and Hunt, V. (2020) COVID-19 in the United Kingdom: assessing jobs at risk and the impact on people and places. Web.
Basu, S. and Bundick, B. (2017) ‘Uncertainty shocks in a model of effective demand’, Econometrica, 85(3), pp. 937-958. Web.
Bell, D. N. F. and Blanchflower, D. G. (2020) ‘US and UK labour markets before and during the Covid-19 crash’, National Institute Economic Review, 252, pp. 52-69.
Freund, L. and Rendahl, P. (2020) ‘Unexpected effects: uncertainty, unemployment, and inflation’, CEPR Discussion Paper, DP14690, pp. 1-58. Web.
Hall, R. E. (2017) ‘High discounts and high unemployment’, American Economic Review, 107(2), pp. 305-330. Web.
How persistent will the impact of Covid-19 on unemployment be? (2020) Web.
King, B. (2020) Unemployment rate: how many people are out of work? Web.
A plan for jobs 2020 (2020) Web.
Şahin, A., Tasci, M. and Yan, J. (2020) ‘The unemployment cost of COVID-19: how high and how long?’, Economic Commentary, 2020(9), pp. 1-7. Web.
UK unemployment tracker (2020). Web.