The level of employment
Definition
Level of employment: how many people in the workforce have paid work.
Unemployment: when people who are able and willing to work cannot find a job.
Consumer spending: the total amount households spend on goods and services.
- The level of employment rises and falls over time, and a business feels the change in two separate places.
- In its sales: people in work have wages to spend, so the number of them decides how much consumer spending there is.
- In its staffing: the number of people looking for work decides how easily the business can fill a vacancy and what it has to pay.
- Those two effects usually pull in opposite directions, so the same change in employment can be good for a business in one place and awkward in the other.
When unemployment is low
- Consumer spending is high. More households are earning, so demand rises and most businesses take more revenue.
- Recruiting gets harder. Fewer people are looking for work, so vacancies stay open longer and jobs are harder to fill.
- The business may have to advertise more widely, or take on less experienced staff and train them, which costs money and time.
- Wages get bid up. Employers compete for the same small pool of workers, so pay rates rise and labour costs go up.
- Higher pay also has to be offered to existing staff to stop them leaving, so the cost applies to the whole workforce, not just new hires.
- For a business with many low-paid staff, that extra wage bill can cancel out much of the gain from higher sales.
Example
- When unemployment is low, a Nando's restaurant is busy but short-staffed, and ends up raising its hourly rate to fill shifts.
- It is competing for the same workers as Greggs and Deliveroo, so none of them can hold pay down for long.
When unemployment is high
- Consumer spending falls. Fewer households have wages coming in, and those still in work often spend cautiously, so demand and sales drop.
- Recruiting gets easier. Many applicants chase each vacancy, so a business fills jobs quickly and can pick from a stronger field.
- Pressure on wages eases, because staff are less able to move elsewhere for more money, so labour costs rise more slowly.
- A business facing falling sales often responds by cutting overtime, not replacing staff who leave, or trimming its product range.
How demand changes as incomes fluctuate
Definition
Disposable income: the money a household has left to spend or save after tax has been taken from its income.
- When incomes rise, spending on wants grows fastest: meals out, holidays, new electricals and branded goods.
- When incomes are squeezed, those same wants are cut first, because the purchase can be delayed or dropped without much difficulty.
- Demand for needs changes far less, because households still buy Tesco groceries and Warburtons bread whatever their income is doing.
- Customers trade down rather than stop buying. They move to cheaper shops and value ranges, so discounters and low-price food chains can gain customers while incomes are falling.
- Businesses react by changing what they offer, such as pushing a value range, adding cheaper pack sizes, or holding prices while incomes are tight.
Example
- As UK incomes were squeezed, Aldi won shoppers from higher-priced supermarkets and Greggs took sales from dearer lunch options.
- Over the same period casual dining chains closed branches, because a sit-down meal is exactly the sort of want households give up first.
Exam technique
- A typical wording is analyse the effect of a fall in unemployment on this business, which needs both sides of the same change: stronger sales, but harder and dearer recruitment.
- When the question is about incomes, state whether the product is a need or a want before you predict what happens to demand.
- Avoid the empty version of this answer, which says spending goes up so the business does better, without ever naming what the business sells.
Self review
- What does the level of employment measure?
- Give one gain and one problem for a café when unemployment falls.
- Why do wage costs tend to rise when unemployment is low?
- What is disposable income?
- Why does a discounter such as Aldi often gain when incomes are squeezed?
