Does capitalism cause unemployment?

unemploymentI recently read a comment on a website by someone saying that capitalism has failed in Britain because unemployment has grown from 1 million when Margaret Thatcher became Prime Minister to nearly 3 million now.

That’s a serious charge, and if capitalism can’t defend itself against that, then it clearly has failed. No economic system that throws millions of people on the scrap heap can be justified. But look a little closer and you’ll see that’s not how it is.

Let’s get the facts right first. In the three months to April 2013, unemployment in the UK stood at 2.51 million. This is the number of people out of work and looking for work.  The number of people claiming jobseeker’s allowance was much lower than this, at 1.51 million, but let’s stick with the worst case numbers and say that unemployment is currently 2.5 million.

When Margaret Thatcher took power in 1979, unemployment was at a then record high of 1.1 million – Thatcher’s famous slogan was, “Labour isn’t working.” Unemployment peaked in 1982 at 3 million, but then fell under the Conservative government to 1.7 million when Labour was elected. However, when Labour left office in 2008, unemployment had again risen to 1.8 million and it has continued to rise under the current Coalition government.

So the picture is complicated and shows no clear pattern. However, it becomes much easier to understand once you realise that unemployment is the wrong statistic to measure. Instead, let us look at the number of people in work.

In the first quarter of 2013, the number of people aged 16+ in employment was 29.71 million. In 1979 it was just 24.92 million. That means that in the past 3 decades, the number of people working in the UK has increased by 5 million.

But a lot of other factors have changed since Thatcher came to power. The population of the UK rose from 56.2 million in 1979 to 62.3 million in 2010 – an increase of 6.1 million people.  The proportion of women in work increased from 53% in 1971 to 66% in 2011, and the number of people aged 65+ still in employment has more than doubled.

Because more people have entered the job market – women, older workers and immigrants – the increase of 5 million in the total number of jobs isn’t quite enough to supply employment for the increased workforce. Hence the number of unemployed people looking for work has risen since 1979.

But this is not an argument against free market capitalism. In the past three decades, capitalism has created 5 million new jobs – an increase of 20%. This is double the rate of population growth. Without those new jobs, unemployment would now be 7.5 million, not 2.5 million. So while 2.5 million unemployed is a personal tragedy for 2.5 million people, it’s the wrong statistic to judge an economic system.

Unemployment is an evil. It robs people of their dignity; it destroys hope; it shatters lives. The free market is our best defence against it.

5 responses to “Does capitalism cause unemployment?

  1. Capitalism hasn’t failed because of unemployment, but on distribution of wealth. We cant give 60% of the wealth created to a small %
    Markets need regulation because products which are popular and get bought by consumers generate wealth, but this wealth isn’t taxed efficiently as companies seek every way possible to pay as little tax as possible and to keep their monopoly. There is no such thing as a free market, as lobbies and powerful companies keep the competitors at bay with dirty tricks.
    If you were born after 1960, you are probably poorer than your parents

    The other giant hole in your argument is the 2.5 billion people in China and India now in the jobs market. They aren’t in any of your stats.they dont have a social system or play on a level playing field.

    read more here

    the good thing about capitalism and off shoring is that its taken billions out of poverty, but the bottom poorest billion are still as poor as ever.

  2. I read your article and I think I have some comments on it. Capitalism is not a unified theory and there are many forms and implementations of capitalism. And I don’t want to defend the capitalism we live now. In the current capitalism there is no free market. You have to address the reason women and older people had to go to work or work longer. Is it because the salary and benefits were so low that more people had to work? In any form of capitalism, In order for capitalism to work you have to have unemployment otherwise the salaries -due to workforce demand- may raise so high that companies will loose profits. When you mentioned the statistics of people employed did you take into account demographic changes such as population increase? Increased population creates increased demand for products and services and this has nothing to do with capitalism even in China there was increased demand for food due to mere population numbers however Mao solved the problem by letting people starve to death. Mind you they were all employed but they were not doing anything productive. Obviously capitalism is the best system out there, but you can’t argue that it does not have problems

    • Thanks Dimitrios. Capitalism (however you want to define it) isn’t perfect of course – no system ever is, and economics is about allocating scarce resources – but I agree that it is the best system we have. The point of this article was to show that capitalism does not deliberately create unemployment in order to exploit workers.

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