Employment and unemployment
Employment: People who are currently in paid work or self-employment for at least one hour per week.
Unemployment: People who are without a job, available to start work immediately, and have taken specific steps to look for work in the last four weeks. Note: Students often confuse retirement with unemployment. Retirement is not unemployment because retirees are not seeking work.
Full Employment: This does NOT mean 0% unemployment. It is the level of employment where there is only frictional and structural unemployment, but no cyclical unemployment. The economy is operating at its maximum sustainable capacity.
\text{Unemployment Rate} = \frac{\text{Number of Unemployed}}{\text{Labour Force}} \times 100
Where:
- Number of Unemployed: People without a job, available to work, and actively seeking work.
- Labour Force: The sum of employed persons + unemployed persons.
Crucial Distinction: Do not divide by the total population. Only those in the labour force count.
- 30 million are employed.
- 2 million are unemployed and looking for work.
- 18 million are students, retirees, or not seeking work.
Step 1: Identify the Labour Force
Labour Force = Employed + Unemployed
Labour Force = 30m + 2m = 32m
Step 2: Apply Formula
Unemployment Rate = (2 / 32) \times 100 = 6.25%
Common Error: Using the total population (50m) as the denominator would give 4%, which is incorrect because the 18 million not seeking work are not part of the labour market.
Correction: The labour force excludes those who are not looking for work (students, retirees, discouraged workers). If a person stops looking for work because they cannot find a job, they drop out of the labour force and are no longer counted as unemployed. This is why official unemployment rates may underestimate true underutilization.
Examiner Acceptance: Examiners accept the phrase 'The Labour Force Survey provides a more accurate measure of unemployment because it includes those who are not claiming benefits but are actively seeking work.'
Reasoning: The claimant count only measures people receiving state unemployment benefits. It excludes those who do not qualify for benefits or choose not to claim them, thus underestimating the true level of joblessness.
| Type | **Cause** |
|---|---|
| Frictional | Temporary unemployment while workers search for new jobs or transition between roles. Caused by imperfect information in the labour market. |
| Structural | Caused by a mismatch between the skills of workers and the requirements of available jobs, or geographical immobility. Often due to technological change or decline of specific industries. |
| Cyclical (Demand-Deficient) | Caused by a fall in Aggregate Demand (AD) during a recession. Firms lay off workers because demand for their products has fallen. |
| Seasonal | Caused by seasonal variations in demand or production (e.g., agriculture, tourism). |
For Producers/Firms: While unemployment lowers wage pressures (reducing costs for firms that remain hiring), it can also lead to a shortage of skilled labour if structural unemployment is high.
For the Government: Increased spending on welfare benefits (fiscal burden) and decreased tax revenues (income tax and VAT from lower consumption).
For the Economy: Loss of potential GDP (output gap). Resources are wasted. High cyclical unemployment leads to a negative output gap, where actual GDP is below potential GDP.
Examiner Acceptance: Examiners accept the phrase 'High unemployment leads to a higher fiscal deficit due to increased spending on state benefits and lower tax revenues.'
Reasoning: This directly links the labour market condition to the government's budget balance. You must mention BOTH sides: increased outflow (benefits) and decreased inflow (taxes).
1. Demand-Side Policies (Fiscal and Monetary)
- Action: Increase government spending, cut taxes, or lower interest rates to boost Aggregate Demand.
- Effectiveness: Highly effective for Cyclical Unemployment. By increasing AD, firms hire more workers to meet higher demand.
- Consequence/Risk: If the economy is already near full employment, boosting AD further causes demand-pull inflation rather than reducing unemployment. It does not solve structural mismatches.
2. Supply-Side Policies
- Action: Education and training programs, improving transport infrastructure, reducing trade union power, or lowering minimum wages.
- Effectiveness: Effective for Structural Unemployment. Training helps workers match skills to jobs; mobility improvements help them move to where jobs are.
- Consequence/Risk: These policies take a long time (long-run) to work. They do not provide an immediate solution to recessionary unemployment. Lowering minimum wages may reduce youth unemployment but can increase poverty and inequality.
Correction: Demand-side policies increase overall demand but do not fix skill mismatches. If a coal miner loses their job due to environmental regulations (structural), printing more money won't give them the skills to become a software engineer. Supply-side policies are required for structural issues.
Examiner Acceptance: Examiners accept the phrase 'Supply-side policies are more effective in the long run for reducing structural unemployment, but demand-side policies are necessary to reduce cyclical unemployment quickly.'
Reasoning: This shows an understanding of time lags and the specific nature of different unemployment types. It avoids the generalization that one policy is always 'better'.