Unemployment and Inflation Rate in the UK Essay

Introduction

The United Kingdom has encountered a fall in unemployment from 3 million in 1992 to under 1 million in 2007. The unemployment has also been falling ever since. The level of inflation has also fallen. From 1997, CPI inflation has been close to the administration's target of 2 percent +/- 1. The unemployment rate has remained at a low level due to increment in wages. There are about 806,000 job vacancies in the UK economy at any one time. The unemployment is currently at 4.2%, the lower it has been since 1975. Numerous factors are influencing low inflation and unemployment rates in the UK. The paper examines the factors for low inflation and unemployment rates in the United Kingdom.

Unemployment and Inflation Rate in the UK

The first element to illustrate the fall in joblessness is fiscal growth. The United Kingdom has faced a prolonged period of undisrupted economic progress since 1992. The economic advancement has averaged 2.6 percent which approximates the long run pattern rate of growth. This fiscal advancement results in increased productivity and thus, companies employ more employees; this means cyclical redundancy is very low. Fiscal growth is one of the most substantial elements for low redundancy in the UK; this can be attributed to the 1992 recession which increased unemployment to 3 million (BBC, 2018).

Fiscal growth usually results in inflation because as the economy progresses, prices begin to rise. Nevertheless, in the case of the United Kingdom, this has not been the case. Inflation has remained low due to steadiness and stability of the economic growth. Development has never been much greater than the long run pattern rate (2.5 percent). Thus, fiscal development has been non-inflationary. This stable rate of fiscal growth is a fundamental factor in sustaining low inflation; if the growth would have occurred at a faster rate, then inflation would have occurred. Most people give credit to the Monetary Policy Committee (MPC) for these moderately nonthreatening fiscal circumstances. The MPC has autonomy in settling interest rates, when inflationary concerns intensify, they react by increasing interest rates. Thus, this has assisted in sustaining low levels of inflation and a positive growth rate. The MPC has also assisted in reducing inflationary anticipations due to high confidence from the people. This has intensified their proficiency (Guardian, 2018).

Nevertheless, aggregate demand cannot entirely describe low inflation and unemployment. The low inflation in an era of economic advancement proposes that supply-side elements are aiding to sustain low inflation. For instance, increased output in the economy sustaining low costs and innovations like the microcomputers and internet are assisting in the reduction of costs for numerous corporations. It is not easy to measure the impacts of output and technologies on inflation; Nonetheless, for numerous electrical products, it is easy to observe falling prices. It is claimed that the UK labor market is moderately flexible. In the past years, the influence of trade unions has reduced, and it is simple to employ and fire employees than in the European Union. This assists in the explanation of the lower natural proportion of redundancy and low inflation in the UK (Wallace, 2017).

Low inflation has been achieved after the stability of the Brexit vote. In January 2018, the inflation rate fell to 3%. The Bank of England explained that the inflation rose at the end of 2017 and was likely to fall back to its target of 2%. In November, the rate of inflation was 3.1%. Low inflation in the UK has been caused by technological change. Technological developments have helped drive down prices of products that use the new technologies widely. A case of this is smartphones are lessening the demand of other gadgets like cameras in the UK market. Technology has also intensified labor productivity, thus lessening unit labor costs. In the UK, the productivity is still high making a case for the low inflation. Globalization has also helped in lowering the UK inflation rate.

Monetary policy has been one of the techniques used to lower inflation in the UK. Since the 1991 recession, the Bank of England increased the interest rate to reduce inflation. The higher interest rates increased the cost of borrowing, lending, and consumer spending. This technique has been moderating fiscal growth and inflationary pressure. The Bank of England has also been controlling the money supply to reduce the rate the inflation. Low inflation in the UK has also been caused by the sustained drop in oil prices which retails at about $46 per barrel. This meant that the UK was about to experience deflation in the currency. However, the wages continued to be sluggish meaning that the living standards have not improved since 2010. The fall in oil prices in the UK and global market has been acting like a massive tax cut for the economy, putting more money in the hands of hard-pressed consumers (Guardian, 2018).

The pace of job creation in the UK is fast due to technological change. Technology has created new avenues for productivity thereby increases job opportunities. Technology has also increased the quality of jobs. The means that more workers are seeking to work in situations where they can apply their technological skills. The rise in the value of the sterling pound has also increased employment rates. The increase in the value of the currency increases the workers' bargaining power. The employees can demand higher wages in their job groups. However, in case the currency's value is low, there would be high unemployment because the workers would be unwilling to work in a low currency market (Wallace, 2017).

In addition, there has been a labor shift due to the increased number of entrepreneurial people and increase in the number of permanent-working employees. In the UK climate of continued economic growth, numerous workers have focused on getting the employment opportunity they would like, and others are taking advantage to start their businesses. The low unemployment rate in the UK has been accompanied by the tighter labor market and higher demands for the available employees. The Bank of England has focused on raising interest rates to ensure stability in the labor market (BBC, 2018).

Conclusion

Conclusively, the UK labor market has been tighter for decades. The unemployment rate is low, and the demand for labor is high. The first factor that can be attributed to low unemployment and inflate rates is economic growth. The UK economic growth has been undisrupted since the 1992 recession. Favorable supply elements have aided low inflation rates. The Bank of England has also increased the interest rates to maintain low inflation. Low inflation has also been achieved due to a reduction in oil prices both in the UK and the global markets. Low unemployment rates in the UK can be attributed to technological change and globalization.

References

BBC. (2018). UK unemployment falls to 1.44 million. Retrieved from: https://www.bbc.com/news/business-42802526 on date 8/12/2018

Guardian. (2018). UK inflation falls unexpectedly to lowest level for a year. Retrieved from: https://www.theguardian.com/business/2018/may/23/uk-inflation-falls-april-lower-airfares-ons on date 8/12/2018

Wallace, T. (2017). UK unemployment falls to joint-lowest level in more than 40 years. Retrieved from: https://www.telegraph.co.uk/business/2017/03/15/uk-unemployment-falls-lowest-level-40-years/ on date 8/12/2018