👋 Welcome to the Economics Hub! Your Guide to Employment and Unemployment (9640)

This chapter is fundamental to understanding Economic Performance. When economists talk about the health of an economy, the unemployment rate is one of the very first indicators they look at. Think of unemployment as the economy running on flat tires—it can’t achieve its full potential output.

In these notes, we will break down how unemployment is measured, explore the different types you need to know, and see how these different causes require different policy solutions. Let's make sure you nail this key topic!

3.2.3.2 Employment and Unemployment

1. Defining and Measuring Unemployment

Key Definitions

First, we need to understand who counts as employed and who counts as unemployed in official statistics.

  • Working Population/Labour Force: This is the total number of people who are either employed or unemployed. It excludes those who are retired, students, or stay-at-home parents not actively seeking work (i.e., they are economically inactive).
  • Employed: Anyone who works for pay, even if only for a few hours a week.
  • Unemployed: People of working age who are without work, are available for work, and have been actively seeking employment.
Measuring Unemployment: The ILO Measure

The official measure used internationally, including by the UK, is based on the International Labour Organisation (ILO) criteria.

The ILO Measure typically involves a survey (like the Labour Force Survey) where individuals are asked if they have been actively seeking work in the past four weeks and are available to start work within the next two weeks.

Calculation:
\[\text{Rate of Unemployment} = \frac{\text{Number of Unemployed}}{\text{Labour Force}} \times 100\]

Unemployment vs. Underemployment

This distinction is crucial!

  • Unemployment: Total lack of a job (as defined by the ILO).
  • Underemployment: This occurs when people are working, but their jobs are *not* utilizing their skills or they wish to work more hours than they currently do.

Example: A PhD graduate working as a barista because they can't find a job in their field is underemployed. Someone working 10 hours a week who wants to work 40 hours is also underemployed.
Underemployment is a sign that the economy is using its human resources inefficiently, even if the unemployment rate looks low.

🔑 Key Takeaway: The ILO standard defines unemployment as actively seeking work. Underemployment means existing workers aren't fulfilling their economic potential (too few hours or under-utilised skills).

2. The Four Types of Unemployment

Unemployment isn't a single problem; it's a mix of different issues, each requiring a tailored solution.

🧠 Memory Aid: Remember the four types using the acronym C-F-S-S (Cyclical, Frictional, Structural, Seasonal).

  1. Cyclical Unemployment (Demand-Deficient)

    This type is directly caused by a downturn in the economic cycle (a recession or slump).
    When Aggregate Demand (AD) falls, firms see lower sales, reduce production, and need fewer workers.

    • Connection: This is closely linked to a negative output gap, where actual output (Real GDP) is below the economy's productive potential (LRAS).
    • Example: During the 2008 Global Financial Crisis, falling consumer confidence caused less spending, leading to mass layoffs in construction and manufacturing.

  2. Structural Unemployment

    This is the most serious long-term form. It occurs due to a mismatch between the skills workers have and the skills employers need, often following major changes in the structure of the economy.

    • Causes: Technological change (automation), shifts in consumer tastes, or geographical shifts in industry location.
    • Problem: These workers often suffer from occupational immobility (lack of necessary skills) or geographical immobility (unwillingness or inability to move).
    • Example: A coal miner loses their job when the mine closes due to a decline in the industry (structural shift) and cannot easily retrain as a software engineer.

  3. Frictional Unemployment

    This is short-term unemployment that occurs when workers are between jobs. It is unavoidable, as people take time to search for the best fit after leaving or losing a job.

    • Analogy: Think of friction in physics—it slows movement. Frictional unemployment is the normal "friction" involved in matching jobs to workers.
    • Fact: Even a healthy economy with a positive output gap will always have some frictional unemployment.

  4. Seasonal Unemployment

    This is job loss that occurs predictably at certain times of the year due to seasonal changes in demand.

    • Example: A ski instructor in summer, or a farmer hired only for the harvest season.
The Natural Rate of Unemployment (NRU)

The NRU is the unemployment rate that exists when the labour market is in equilibrium, and there is no cyclical unemployment. It consists only of structural, frictional, and seasonal unemployment. This is sometimes called full employment.

Quick Review: Cyclical (bad economy), Structural (skills mismatch/tech change), Frictional (between jobs), Seasonal (time of year).

3. Determining Employment: Demand-Side and Supply-Side Factors

Employment levels are determined by the demand for and supply of labour, which are influenced by wider macroeconomic factors.

A. Demand-Side Factors (Influencing AD and Cyclical Unemployment)

These factors influence the total amount of spending in the economy. Higher Aggregate Demand means firms need more workers, reducing cyclical unemployment.

  • Interest Rates: Lower rates encourage borrowing, leading to higher Consumption (C) and Investment (I), increasing AD and the demand for labour.
  • Fiscal Policy: Government spending (G) increases directly boost AD and employment. Tax cuts increase disposable income, boosting C.
  • Confidence: High consumer and business confidence leads to more spending and investment, increasing labour demand.
B. Supply-Side Factors (Influencing LRAS and Structural/Frictional Unemployment)

These factors relate to the quantity and quality of the labour force itself, influencing the normal capacity level of output (the position of the LRAS curve).

  • Productivity and Education: Improvements in education and training increase labour productivity and efficiency. This makes workers more desirable and reduces structural unemployment.
  • Labour Market Flexibility: Reduced trade union power, easier hiring/firing, and lower barriers to movement (immobility) can reduce frictional and structural unemployment.
  • Demographic Change: Changes in the working population size (e.g., immigration or birth rates) affect the overall supply of labour.

4. Global Influences and Policy Responses

Global Influences on Employment

In a globalized world, domestic employment levels are heavily affected by what happens abroad.

  • Economic Activity Abroad: If major trading partners (like the USA or China) enter a recession, their demand for our exports (X) falls. Since X is a component of AD, this reduction slows domestic growth and increases cyclical unemployment.
  • Relocation (Outsourcing): Globalisation means firms can move production to countries with lower wage costs. This often creates structural unemployment in the country the firm leaves.

Did you know? The rise of manufacturing in Southeast Asia in the late 20th century led to severe structural unemployment in traditional manufacturing regions of Europe and North America.

Policy Implications: Matching the Cure to the Cause

A core principle in macroeconomics is that the appropriate policy depends entirely on the cause of the unemployment.

1. Addressing Cyclical (Demand-Deficient) Unemployment:

Since this is caused by low demand, Demand-Side Policies are appropriate:

  • Monetary Policy: Central bank lowers interest rates (making borrowing cheaper and saving less attractive) to boost C and I.
  • Fiscal Policy: Government increases spending or cuts taxes to boost AD directly.

2. Addressing Structural and Frictional Unemployment:

Since this is caused by issues within the labour market itself (immobility, lack of skills), Supply-Side Policies are required. These policies shift the LRAS curve to the right:

  • Education and Training: Government spending on vocational training to reduce occupational immobility (helping miners retrain as nurses).
  • Improving Information: Better job centres and online services reduce the time taken to find a job, minimizing frictional unemployment.
  • Subsidies for Moving: Incentives for workers to move from high-unemployment areas to high-employment areas, tackling geographical immobility.

🚨 Common Mistake to Avoid: Using demand-side policies to solve structural unemployment is dangerous! If the economy is at full capacity (LRAS), increasing AD will only cause inflation, not reduce structural joblessness. The problem isn't a lack of jobs, but a lack of *suitable* workers for the available jobs.

🔑 Chapter Summary: Key Takeaways

Unemployment is measured using the ILO standard, which includes those actively seeking work. We distinguish between unemployment and underemployment (working below potential). The four types of unemployment (C-F-S-S) each have distinct causes (AD failure vs. supply-side rigidity). Effective policy requires correctly identifying the root cause: use demand-side tools for cyclical slumps and supply-side reforms for long-term structural issues.