Economics (9708) | Unemployment

👋 Welcome to the Unemployment Chapter!

Hello future economist! This chapter is vital because unemployment is one of the four main objectives of macroeconomic policy (alongside growth, price stability, and balance of payments stability). Understanding why people lose jobs and what happens as a result helps us analyse how governments try to manage the economy.

Don't worry if this seems tricky at first—we will break down the types of unemployment using clear, real-world examples!

Section 1: Defining and Measuring Unemployment (Syllabus 4.5.1 & 4.5.2)

1.1 What is Unemployment?

In Economics, the definition of unemployment is very precise. It is not just about someone not having a job.

• The Labour Force (or economically active population) includes all people currently employed AND all people currently unemployed.
• Employed: People who work for pay, even if part-time.
• Unemployed: People of working age who are able, willing, and actively seeking work but do not have a job.

1.2 Measuring Unemployment

Governments typically use two main methods to calculate the number of unemployed people and the Unemployment Rate.

A. Calculation of the Unemployment Rate

The unemployment rate is expressed as a percentage of the total labour force:

$$ \text{Unemployment Rate} = \frac{\text{Number of Unemployed People}}{\text{Labour Force}} \times 100 $$

Example: If a country has 100 million people in its labour force, and 5 million are unemployed, the rate is 5%.

B. Measurement Methods

Different methods give different figures, leading to possible difficulties in measurement:

1. Labour Force Survey (LFS): This is usually the internationally recognised standard (like the ILO method). It involves surveying a large sample of households and asking questions about their employment status and active job-seeking over the last month.
2. The Claimant Count: This measures the number of people claiming unemployment-related benefits from the government.

The LFS is generally considered more accurate as it captures people seeking work who may not qualify for benefits, but it is expensive and time-consuming. The Claimant Count is easy and cheap but often underestimates the true level of unemployment.

C. Difficulties in Measurement (The Hidden Story)

Official figures rarely tell the whole story. Several groups complicate accurate measurement:

• Discouraged Workers: These are people who have been unemployed for so long they stop actively looking for a job. Since they are no longer "actively seeking," they drop out of the labour force and are NOT counted as unemployed. This causes the official rate to fall, hiding the true extent of joblessness.
• Underemployment: People who are working, but want to work more hours (e.g., a graduate working two days a week at a coffee shop). They are counted as "employed," but their skills and potential are underused.
• Hidden Unemployment: People working in the shadow economy (doing illegal or cash-in-hand jobs) are counted as "unemployed" or "out of the labour force" officially, even though they are earning.
• Inaccurate Claims: Some people claim benefits but are not genuinely seeking work, while others are working but still claiming benefits (fraud).

Section 2: Causes and Types of Unemployment (Syllabus 4.5.3)

Unemployment is not one single problem; it has many different causes. Economists categorize these causes into different types. You need to know these types well, as they require different policy solutions.

2.1 Types of Unemployment Related to Demand (Short-Run)

A. Cyclical Unemployment (Demand-Deficient Unemployment)

This is the most common and often the most severe type, caused by a lack of overall spending (Aggregate Demand) in the economy.

• Cause: The economy enters a recession or downturn (a phase of the business cycle). Firms reduce output and investment because consumers are spending less, leading to layoffs.
• Analogy: The Economic Roller Coaster. When the economy is zooming up (boom), cyclical unemployment is low. When it hits the dip (recession), people are laid off, and cyclical unemployment rises.
• Cure: Since the problem is lack of demand, the cure is to boost Aggregate Demand (e.g., lower interest rates or increase government spending).

2.2 Types of Unemployment Related to Supply/Structure (Long-Run)

B. Structural Unemployment

This is a long-term problem caused by a mismatch between the skills workers possess and the skills required for the available jobs.

• Cause: Fundamental shifts in the economy, such as the decline of traditional industries (e.g., coal mining, manufacturing) and the growth of new ones (e.g., tech, green energy).
• Problem: Workers in the declining sector (e.g., textile workers) may lack the geographical mobility (unable to move where the jobs are) or occupational mobility (lacking the necessary skills) to fill the new vacancies.
• Cure: Requires Supply-Side Policies, such as retraining schemes, education, or improving infrastructure to boost geographical mobility.

C. Technological Unemployment

This is often considered a subset of structural unemployment, specifically where workers are replaced by machines or automated processes.

• Cause: Advancements in technology (e.g., self-checkouts replacing cashiers, or robots replacing assembly line workers).
• Did you know? While it destroys some jobs, technology can also create new jobs (e.g., maintenance technicians for the robots, software developers).

2.3 Natural and Short-Term Unemployment

D. Frictional Unemployment

This is short-term unemployment that occurs when people are between jobs. It is considered a necessary and natural part of a dynamic economy.

• Cause: Workers take time to search for the best new job, or employers take time to find the perfect employee. This "search time" creates a temporary gap.
• Analogy: Moving House. You don't instantly move from your old house to your new one; there's always a short period where you are "homeless" (or job searching).
• Cure: Improving the efficiency of job information (e.g., better online job sites) can reduce the duration, but it can never be eliminated entirely.

E. Seasonal Unemployment

This type is predictable and caused by regular, recurring changes in the demand for labour throughout the year.

• Cause: Industries that rely on specific weather conditions or holiday patterns (e.g., tourist guides, agricultural workers, Santa Claus impersonators).
• Cure: Encouraging workers to acquire transferable skills or encouraging the industry to diversify its demand throughout the year.

2.4 The Natural Rate of Unemployment (NRU) (A-Level Concept Introduced Early)

When discussing full employment, we need to recognise that the unemployment rate is never zero.

• The Natural Rate of Unemployment (NRU) is the unemployment rate that exists when the labour market is in equilibrium (i.e., when there is NO cyclical unemployment).
• The NRU consists of Frictional, Structural, and Seasonal unemployment.
• Any unemployment above the NRU is usually cyclical (demand-deficient).
• Full employment is achieved when the unemployment rate equals the NRU.

Section 3: Consequences of Unemployment (Syllabus 4.5.4)

High unemployment causes major costs to individuals, firms, and the entire nation. These consequences can be split into economic (money/output related) and social (human/welfare related).

3.1 Economic Consequences (The Cost to the Nation)

These consequences relate directly to the macroeconomic performance indicators:

• Lost Output (Lower GDP): Unemployed labour means production potential is wasted. If the economy is inside its Production Possibility Curve (PPC), it is operating inefficiently. This is the biggest cost.
• Wasted Resources: Labour, a key Factor of Production, is idle. This underutilised potential reduces the overall efficiency of the economy.
• Increased Government Spending: The government must pay out more in unemployment benefits and other welfare payments (known as transfer payments).
• Lower Tax Revenue: With fewer people working and earning income, the government collects less income tax, less sales tax (VAT/GST), and less corporate tax.
• Budget Deficit: The combination of high spending on benefits and low tax income usually worsens the government’s budget balance, often leading to increased national debt.

3.2 Social Consequences (The Human Cost)

These impacts affect the quality of life and social cohesion of the country:

• Increased Poverty and Income Inequality: Unemployment leads to a significant loss of income for households, pushing more people into poverty and widening the gap between the rich (employed) and the poor (unemployed).
• Social Stress and Health Issues: Job loss often causes stress, mental health problems, and physical illness. Studies show higher unemployment rates correlate with higher rates of heart disease and stress-related conditions.
• Increased Crime Rates: In areas with high unemployment, crime and anti-social behaviour often increase as people seek alternative, often illegal, means of generating income.
• Loss of Human Capital: Long-term unemployment can cause workers' skills to become rusty or obsolete, making it harder for them to find a job even when the economy recovers (a process sometimes called hysteresis).
• Lowered Self-Esteem and Morale: For the individual, unemployment leads to a loss of dignity and morale, affecting not just the worker but their entire family.