Economics (0455) | Employment and unemployment

Welcome to Chapter 4.7: Employment and Unemployment!

Hello Economists! This chapter is vital because having a job (employment) is the backbone of a strong economy and a happy society. Governments care deeply about keeping unemployment low, as it's one of their four main macroeconomic goals.

In these notes, we will define exactly what unemployment is, learn how we measure it, explore the different reasons why people lose jobs, and study the policies governments use to try and solve this crucial economic problem.

4.7.1 Definitions: Working, Not Working, and the Goal

The Labour Force

Before we define unemployment, we need to know who is included in the labour force (or working population).

• The Labour Force includes all people of working age who are either employed or unemployed.
• It excludes people who are neither working nor looking for work (e.g., retirees, full-time students, or those who choose to stay at home).

What is Employment?

Employment is when a factor of production (usually labour) is actively being used to produce goods and services.

A person is employed if they are working for pay or profit.

What is Unemployment?

Unemployment occurs when people who are able, willing, and actively seeking a job cannot find one.

Quick Tip: If you are 17 and choose to stay home playing video games instead of looking for a job, you are NOT considered unemployed in economic terms. You are simply outside the labour force.

What is Full Employment?

This is often misunderstood!

• Full Employment does not mean 0% unemployment. It is impossible to achieve zero unemployment because people are always changing jobs.
• Full employment is defined as the level of employment that exists when the economy is producing at its maximum potential, and only frictional and structural unemployment remain (we will discuss these types below).

4.7.3 Measuring Unemployment

The government needs to know how many people are unemployed to judge the health of the economy. They use two main methods:

1. The Claimant Count

This method measures the number of people who are claiming unemployment benefits from the government (e.g., jobseeker allowances).

• Advantage: It is cheap and easy to collect, as the data comes directly from government administrative systems.
• Disadvantage: It often underestimates actual unemployment, as many people who are unemployed may not be eligible for or may choose not to claim benefits.

2. The Labour Force Survey (LFS)

This method involves surveying a large sample of households and asking them directly if they are working or actively looking for work, based on international standards (like those set by the International Labour Organisation, ILO).

• Advantage: It provides a more comprehensive and generally higher figure for unemployment, as it includes people who are not claiming benefits.
• Disadvantage: It is much more expensive and complex to conduct regularly.

Calculating the Unemployment Rate

The key measure is the Unemployment Rate, which is calculated as a percentage:

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

Example: If 1 million people are unemployed and the total labour force is 50 million, the unemployment rate is 2%.

4.7.2 Changing Patterns and Levels of Employment

The types of jobs available and who does them changes dramatically as an economy develops.

Shift in Economic Sectors

As countries develop from low-income to high-income, employment tends to shift:

• Primary Sector: (Extraction of raw materials - e.g., farming, mining) Declines significantly as mechanisation increases and other sectors grow.
• Secondary Sector: (Manufacturing and production - e.g., factories making cars) Increases during industrialisation, but then tends to decline as firms relocate production overseas (globalisation) or automate.
• Tertiary Sector: (Services - e.g., banking, education, healthcare, tourism) Increases dramatically in developed economies, often becoming the largest sector.

Did you know? In many developed economies, over 70% of employment is now in the tertiary sector.

Other Key Changes in Employment Patterns

• Increased proportion of women in the labour force: Changes in social attitudes, better education, and reduced gender discrimination have led to more women seeking and holding jobs.
• Formal vs. Informal Economy: As economies develop, more employment shifts from the informal economy (unregulated, often untaxed jobs, like street vendors in some countries) to the formal economy (regulated, taxed employment).
• Decline in Public Sector Employment: When a country shifts towards a market economy (often through privatisation), the government employs fewer people directly, leading to a smaller public sector (jobs in state-owned hospitals, government offices) and a larger private sector.

4.7.4 Causes and Types of Unemployment

Don't worry if these sound tricky! We can break down unemployment into three main types based on their cause. Memorise the F-S-C types!

F: Frictional Unemployment

This is short-term unemployment that occurs when workers are in between jobs.

• Cause: Imperfect information in the labour market; time taken to search for, apply for, and start a new job.
• Analogy: It’s like waiting at the bus stop after you missed the first bus—you know the next one is coming, but you have a short wait.
• Impact: Usually considered inevitable and not a major problem, especially since it is short-term.

S: Structural Unemployment

This is the most serious type and arises due to a long-term decline in demand for the products of a specific industry.

• Cause: Mismatch between the skills workers have and the skills employers need. This is often caused by technological change or changes in consumer preferences.
• Example: Coal miners becoming unemployed because the country switches to renewable energy (a change in demand for the product).
• Structural unemployment is linked to immobility of labour:
  • Occupational Immobility: Workers lack the skills (training/education) to switch jobs.
  • Geographical Immobility: Workers are unwilling or unable to move area (due to family, housing costs) to find new jobs.

C: Cyclical Unemployment (Demand-Deficient)

This type is caused by a lack of overall demand in the economy, usually during an economic slowdown or recession.

• Cause: When the economy enters a recession, people spend less (low consumer confidence), and firms face reduced demand. They cut production and therefore need fewer workers.
• Analogy: If the entire school canteen stops selling all food, all canteen workers become unemployed—it doesn't matter how skilled they are.
• Impact: This is involuntary, widespread, and can last a long time. It is a major macroeconomic problem.

4.7.5 Consequences of Unemployment

High unemployment causes problems for everyone in the economy.

Consequences for the Individual

• Loss of Income: Workers lose their wage, leading to a fall in their standard of living and potentially poverty.
• Loss of Skills/Morale: Long-term unemployment can cause skills to become rusty, making it harder to find work later, leading to depression and social isolation.

Consequences for Firms

• Lower Demand: As unemployed workers have less income, overall consumer spending falls, meaning less revenue and profit for firms.
• Easier Recruitment (sometimes): In the short term, firms can pick from a larger pool of job seekers, which can lower wage costs.

Consequences for the Economy as a Whole

• Loss of Potential Output: Unemployed resources (labour) mean the economy is producing inside its Production Possibility Curve (PPC). The nation loses out on the goods and services that could have been produced.
• Increased Government Spending: The government must spend more on unemployment benefits and social welfare payments.
• Lower Tax Revenue: Unemployed people pay less income tax and spend less (reducing indirect tax revenue like VAT). This causes budget deficits.
• Increased Social Problems: Higher crime rates, poverty, and political instability can result from widespread long-term unemployment.

4.7.6 Policies to Reduce Unemployment

Government policies must target the specific type of unemployment they are trying to fix.

1. Tackling Cyclical (Demand-Deficient) Unemployment

Since this is caused by low demand, the government uses expansionary demand-side policies to boost spending.

• Fiscal Policy:
  Measures: Increase Government Spending (e.g., building new roads) or Decrease Direct Taxes (e.g., income tax cuts).
  Effect: Both measures increase overall demand (spending) in the economy, encouraging firms to hire more workers.
• Monetary Policy:
  Measures: Decrease Interest Rates.
  Effect: Lower rates make borrowing cheaper and saving less attractive. This encourages consumers and firms to spend and invest more, boosting demand and creating jobs.

2. Tackling Structural and Frictional Unemployment

Since these types are related to skill gaps and mobility issues, the government uses Supply-Side Policies, which focus on improving the quality and flexibility of the labour force.

• Education and Training:
  Measures: Fund vocational training or adult education programmes.
  Effect: Reduces occupational immobility by giving workers the new skills needed for growing industries.
• Labour Market Reforms:
  Measures: Reduce trade union power; lower minimum wage (this is controversial as it reduces workers' income).
  Effect: Makes the labour market more flexible, allowing wages to fall and potentially encouraging firms to hire more people.
• Improving Incentives/Mobility:
  Measures: Subsidies for relocation; improving job centers to match people with vacancies faster.
  Effect: Reduces geographical immobility and frictional unemployment.

Effectiveness of Policies (Evaluation)

Why Demand-Side Policies might fail:

• Time Lags: Changes in interest rates or government spending take many months to affect the economy.
• Confidence: If people lack confidence during a deep recession, they may save tax cuts or refuse to borrow money, making the policies ineffective.

Why Supply-Side Policies might fail:

• High Cost: Education and training programmes require large government investment.
• Slow Impact: It takes many years for new training schemes to produce workers with the necessary skills.
• No guarantee of jobs: Simply retraining people doesn't help if there is no demand in the economy (i.e., if the unemployment is cyclical, not structural).