Should We Expect A Decrease in Unemployment and Poverty?

I wrote this article for Positive Money. It was first published on the Positive Money Website on August 24, 2011You can also read it on www.positivemoney.org.uk/blog. I am publishing this on my blog so that people who access to my blog read this as well.

Poverty is one of the most prominent problems of the entire world. Numerous measures have been taken world wide to reduce poverty but it is still a burning issue. It is particularly much discussed in the post financial crisis period because an economic slowdown affects businesses, who cut back on production and costs, which in turn leads to an increase in unemployment. Unemployment is the main cause of poverty with other factors such as higher indirect taxes, high inflation that take higher percentage of low income group leading to low disposable income.

The unemployment rate of UK over the last seventeen (17) years was highest in early 1990s.  The unemployment rate in early 1990s was around 12 percent in Inner London, 10 percent in London, 9 percent in Outer London and 7 percent in the rest of England.

Unemployment rate started to decrease due to expansion of financial sector as banks had excess liquidity and these banks lent to health sector, construction, education, real estate, public administration and defense (but predominantly real estate and property). These sectors contribute more than 58 percent of GDP. Over the last decade these sectors also expanded due to excessive credit extension (i.e. too much lending) leading to decrease in unemployment.

During the financial crisis when the entire economy collapsed the unemployment rate rose significantly in the entire UK. The following graph shows the unemployment rate during the financial crisis.

Unemployment, Inner, Outer, London and rest of England

Labour Force Survey stated that in 2007 due to economic breakdown the unemployment rate in Inner London was 6 percent, and 5 percent in Outer London. In 2009 unemployment rate for Inner London and Outer London both were around 7 percent. It is important point to note  that the unemployment rate gap was wider between London and the rest of England from early 1990s till 2007 but it was nearly equal in 2009 which means that due to financial crisis increase in unemployment was witnessed in entire UK.

The number of part time workers also grew by 8 percent from 760,000 in 2007 to 825,000 in 2009. The increase in part time workers was due to the fact that they were not able to find full time jobs.

The increase in unemployment also leads to increase in Job Seekers’ Allowance, which is a drag on public finance (although a very small proportion of government revenue goes towards job seekers’ allowance). The following figure shows the increase in job seekers allowance payment. The highest increase was in the West Midlands and North East.

The high inflation rate is also pushing low income households in poverty by decreasing their purchasing power. Inflation rate in the UK is 4.4 percent against a target inflation rate of 2 percent.

The UK economy recorded a growth of only 0.2 percent in the second quarter and with lending cut by banks means that there will be negligible growth of the economy as eight largest sectors, which contribute around 58 percent of economic output, are dependent on private borrowing. This means that we should expect further increases in unemployment and higher levels of poverty going forwards.

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