Unemployment and Unemployment Rates: Your Essential Study Guide
Hey everyone! Welcome to your study notes for one of the most talked-about topics in Economics: Unemployment. Ever wonder why finding a job is a big deal for the whole economy, not just for the person looking for one? This chapter will answer that. We'll break down what unemployment really means, how to measure it, and why it's such an important indicator of a country's economic health. Don't worry if it sounds complicated, we'll go through it step-by-step with simple examples. Let's get started!
Part 1: The Building Blocks - Who's Who in the Labour Market?
Before we can talk about unemployment, we need to understand who we are actually talking about. We can't just include everyone! Economists have specific categories.
1. The Labour Force: The "Team" of the Economy
Think of a country's economy like a giant sports team. The labour force is all the people who are officially "on the team" – they are either playing on the field or are on the bench, ready and wanting to play.
In economics, the labour force is the total number of people who are either employed OR unemployed.
Labour Force = Employed Population + Unemployed Population
Quick Review: Who is NOT in the labour force?
Some people are not on the "team" at all, and that's perfectly fine! They are not counted in the labour force. This includes:
- Full-time students
- Homemakers
- Retired persons
- People who are not looking for a job for any reason
For example, your 70-year-old grandfather who is happily retired is not in the labour force. A university student focusing on their studies is also not in the labour force.
2. Defining the "Unemployed"
So, who are the players on the bench? The unemployed are not just people without a job. The economic definition is more specific.
An unemployed person is someone who wants a job but has failed to find one.
This generally means they are:
- Without a job.
- Actively looking for a job.
- Available to start work.
Example: Siu Keung lost his job as a chef last month. He has been applying for jobs online every day and is ready to start working immediately. Siu Keung is unemployed. His friend, Ah Fai, quit his job to travel the world for a year and isn't looking for work. Ah Fai is NOT unemployed; he is not in the labour force.
Important Note for HKDSE!
The syllabus says you are NOT expected to know the very technical or legal definitions used by the Census and Statistics Department to gather data. Just focus on the core economic meaning: wanting a job but being unable to find one.
3. Defining the "Underemployed"
This is a slightly different situation. Underemployed people have a job, but it's not enough.
An underemployed person is someone who is involuntarily working less than specified working hours.
This means they want to work more hours (e.g., full-time) but can only find part-time work or have had their hours cut by their employer.
Example: May is a trained architect, but due to a slow property market, her firm cut her hours from 40 hours a week to just 15. She wants to work full-time but can't. May is underemployed.
Key Takeaway for Part 1
To be unemployed, you must be in the labour force but without a job. To be underemployed, you have a job but are working fewer hours than you want to. People not looking for work are not in the labour force.
Part 2: Doing the Maths - Calculating the Rates
Now that we know the definitions, let's learn how to calculate the key statistics you see in the news. It's just simple percentage calculation!
1. The Unemployment Rate
The unemployment rate measures the percentage of the labour force that is unemployed.
Here is the formula:
$$ \text{Unemployment Rate} = \frac{\text{Number of Unemployed}}{\text{Labour Force}} \times 100\% $$Step-by-Step Example:
Let's imagine the city of Bauhinia has the following population data:
- Employed people = 950,000
- Unemployed people = 50,000
- People not in the labour force = 200,000
Step 1: Find the Labour Force.
Remember, Labour Force = Employed + Unemployed.
Labour Force = 950,000 + 50,000 = 1,000,000
Step 2: Plug the numbers into the formula.
$$
\text{Unemployment Rate} = \frac{50,000}{1,000,000} \times 100\%
$$
Step 3: Calculate the result.
Unemployment Rate = 0.05 x 100% = 5%
2. The Underemployment Rate
The formula is very similar! The underemployment rate measures the percentage of the labour force that is underemployed.
$$ \text{Underemployment Rate} = \frac{\text{Number of Underemployed}}{\text{Labour Force}} \times 100\% $$Using our Bauhinia City example, if there were 20,000 underemployed people, the underemployment rate would be (20,000 / 1,000,000) x 100% = 2%.
Heads Up! A Common Mistake to Avoid
The most common mistake is dividing by the total population instead of the labour force. The unemployment rate is NOT about the whole population, only those who are economically active (the "team"). Always calculate the labour force first!
Key Takeaway for Part 2
Both the unemployment and underemployment rates are percentages of the labour force. Master the formulas and always remember to use the correct denominator (Labour Force = Employed + Unemployed).
Part 3: The Big Picture - Unemployment and the Economy's Health
Unemployment numbers tell us a story about the whole economy. Let's learn to read that story.
1. Full Employment: The Goal
Does a healthy economy have 0% unemployment? Surprisingly, no! Full employment is a situation where the economy is operating at its sustainable capacity. There will always be some people between jobs or looking for their first one. Full employment means the unemployment rate is low and stable, not necessarily zero.
2. Deflationary (Output) Gap: When the Economy is Sluggish
This is what happens during a recession. A deflationary gap (or output gap) occurs when the economy's actual output is less than its potential output at full employment.
Key connection: A deflationary gap means there is an excess supply of labour. In simple terms, there are more people looking for jobs than there are jobs available. This leads to high unemployment.
Analogy: Imagine a factory that can produce 1,000 toys a day (full employment). If it's only producing 700 toys, many workers will be standing around with nothing to do. That's a deflationary gap and high unemployment.
3. Inflationary (Output) Gap: When the Economy is Overheating
This is the opposite situation. An inflationary gap occurs when the economy's actual output is greater than its potential output at full employment. This can happen temporarily if factories and workers are working overtime.
Key connection: An inflationary gap means there is an excess demand for labour. There are more jobs available than there are workers to fill them. This leads to very low unemployment.
Analogy: The toy factory is now trying to produce 1,200 toys a day. It has to pay workers overtime and is struggling to find enough staff. The machines are running too hot. That's an inflationary gap and very low unemployment.
Key Takeaway for Part 3
High unemployment is linked to a deflationary gap (economy is underperforming).
Very low unemployment is linked to an inflationary gap (economy is overheating).
Part 4: Why We Care - The Costs of Unemployment
Unemployment isn't just a statistic; it has real, negative consequences for people and the country.
1. Costs to the Unemployed Individual
For the person who is unemployed, the costs are direct and often severe:
- Loss of income: This is the most obvious cost. Without a salary, it's difficult to pay for daily necessities and support a family.
- Loss of skills: The longer someone is out of work, the more their job skills can become rusty or outdated.
- Psychological costs: Unemployment can lead to stress, anxiety, loss of self-esteem, and other mental health issues.
2. Costs to Society
When many people are unemployed, the whole country feels the impact:
- Loss of output: This is the biggest economic cost. Every unemployed person represents potential goods and services that are not being produced. This leads to a lower Gross Domestic Product (GDP).
- Increased government spending: The government may need to spend more on social welfare payments (like CSSA in Hong Kong) to support the unemployed. This is an opportunity cost – that money could have been spent on education or healthcare.
- Social problems: High unemployment can sometimes be linked to higher crime rates and social unrest.
A final thought on the syllabus!
The syllabus mentions you do NOT need to know about the 'Phillips Curve'. So if you see that term in other books, don't worry about it for your DSE exam!
Key Takeaway for Part 4
The costs of unemployment are significant, affecting individuals through lost income and stress, and society through lost production (lower GDP) and increased social burdens.
Part 5: Interpreting Data in Hong Kong
In your exam, you might be given a chart or a table showing the unemployment rate in Hong Kong over a few years. You will be expected to read it and describe what's happening.
For example, if you see the line on a graph going up, you can say: "The unemployment rate in Hong Kong was rising from Year X to Year Y." If it's going down, you can say it was "falling" or "improving". It's about applying these concepts to real-world data!
You've made it to the end! This chapter is all about definitions, formulas, and connections. Review the key terms in bold and make sure you can explain the story behind the numbers. Good luck!