1. Introduction:

Unemployment increased substantially across the world after the sharp oil price rises in 1970s and the collapse of the fixed exchange rates system. But unlike many other parts of the world, unemployment in many European countries never returned to its low levels seen during the golden age after the Second World War. Unemployment has generally been shown to have long-term negative consequences on the individual level, even after reemployment. These include considerable and sustained income losses among reemployed workers. In the US, for example, the estimated loss in income of those re-entering employment after a period of unemployment – relative to those without unemployment experience – is between 10% and 25% (Fallick, 1996). The figures for the UK are estimated to be somewhat lower, at between 6% and 10% (Arulampalam, 2001; Gregory and Jukes, 2001).

As a result, since 1970s one of the major issues in macroeconomics has been the extent to which low output and high unemployment are caused by deficient demand and how far they are the result of supply-side factors such as: high real wages, unemployment benefits and so on. Many of these supply-side factors involve arguments about the nature of the labour market.

The question underlying most discussions of these problems is why did European unemployment remain persistently high? The standard explanation is that industrialised economies became more unstable and more frequently subject to shocks. Other questions rises also are, what cause that unemployment, how much unemployment is due to supply-side factors and why countries have different growth level of unemployment?

This essay will start by outlining in brief both the causes for unemployment in general and the supply-side policies especially for labour market. Then illustrate what cause the European unemployment crisis in general during the last two decades and how UK government and policy makers’ responses to it. Finally, set up the conclusion.