Employment and Unemployment

Key Definitions

Unemployed: An individual of working age who is without work, but is willing and able to work, and is actively seeking employment.

Labour Force: The total of those in employment and those unemployed who are actively seeking work.

Economically Inactive: People of working age who are not seeking work, such as full-time students, early retirees, the long-term sick, and discouraged workers.

Measuring Unemployment in the UK

Two main methods are used:

ILO or Labour Force Survey (LFS): The internationally comparable measure. It is a household survey based on the ILO criteria. To be classified as unemployed, a person must be without work, available to start work within the next two weeks, and have actively sought work in the last four weeks. The LFS is usually higher than the Claimant Count because it captures all unemployed people, including those who do not claim benefits.

Claimant Count: Measures the number of people claiming unemployment-related benefits, such as Jobseeker's Allowance. It is usually lower than the LFS measure because not all unemployed people claim benefits.

Types and Causes of Unemployment

Structural Unemployment: Caused by a mismatch between the skills of workers and the requirements of available jobs, often due to technological change or shifts in the economy. For example, the decline of coal mining and the rise of renewable energy has led to structural unemployment in certain regions.

Cyclical (Demand-Deficient) Unemployment: Caused by a lack of aggregate demand in the economy, leading to job losses during economic downturns or recessions. For example, during the 2008 financial crisis, many businesses reduced their workforce due to falling demand for goods and services.

Frictional Unemployment: Short-term unemployment that occurs when people are between jobs, such as recent graduates or those who have voluntarily left a job to find a better one. For example, a software engineer may leave their current position to search for a role that offers better career growth or a higher salary. During this search period, they are considered frictionally unemployed.

Seasonal Unemployment: Caused by fluctuations in demand for certain types of labour at different times of the year. For example, a ski instructor may be unemployed during the summer months when there is no demand for skiing lessons.

Real Wage Unemployment: Occurs when wages are set above the market-clearing level, leading to excess supply of labour. This can be caused by minimum wage laws or trade union negotiations.

Underemployment

Underemployment: occurs when workers are in jobs that underutilise their skills or when they want to work more hours than they currently do. For example, a qualified teacher working part-time as a barista due to a lack of teaching vacancies is underemployed.

It represents a waste of productive potential and is often hidden within employment statistics.

The Impact of Unemployment

On Individuals:

• Lower disposable income and standard of living.
• Loss of skills and work experience, making it harder to find employment in the future.
• Negative impact on mental and physical health due to stress and anxiety.

On the Economy/Government:

• Lower consumer spending, reducing AD.
• Increased government spending on welfare benefits and unemployment support, increasing the budget deficit.
• Lower tax revenue from income tax and VAT, increasing the budget deficit.
• Potential social unrest and increased crime rates due to economic hardship.

On Firms:

• Lower consumer spending reduces sales and profits.
• Firms may benefit from a larger pool of labour, allowing them to hire workers at lower wages.

The Impact of Migration on the Labour Market

Impact on Employment: Migration can increase the supply of labour, potentially leading to lower unemployment if migrants fill labour shortages. However, it can also increase competition for jobs, particularly in low-skilled sectors, which may lead to higher unemployment among native workers in those sectors.

Impact on Unemployment: Migrants may compete for some jobs, potentially increasing unemployment among native workers in certain sectors. However, migrants can also create new jobs by increasing demand for goods and services, which can reduce unemployment in the long run.