Employment and Unemployment
These Edexcel A-Level Economics revision notes cover unit 2.1.3, explaining how unemployment is measured, the different types of unemployment and their causes, and the economic and social costs of high 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.
Cyclical (Demand-Deficient) Unemployment: Caused by a lack of aggregate demand in the economy, leading to job losses during economic downturns or recessions.
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.
Seasonal Unemployment: Caused by fluctuations in demand for certain types of labour at different times of the year, such as agricultural workers or holiday resort staff.
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, trade unions, or efficiency wages.
Underemployment
Underemployment: occurs when workers are in jobs that underutilise their skills or when they want to work more hours than they currently do.
It represents a waste of productive potential and is often hidden within employment statistics.
The Impact of Unemployment
On Individuals: Loss of income, skills atrophy, poverty, health problems, and social isolation.
On the Economy: A waste of scarce resources, especially labour, leading to a loss of potential output, a negative output gap, and lower GDP.
On the Government: Higher spending on welfare benefits and lower tax revenue from sources such as income tax and VAT, worsening the government budget.
On Firms: Lower consumer spending reduces sales and profits, although a larger pool of labour may reduce wage pressures.
The Impact of Migration on the Labour Market
On Employment: Immigration increases the size of the labour force, which can help fill skill shortages and vacancies and may increase total output.
On Wages: Theory suggests that a larger supply of labour could put downward pressure on wages, especially in low-skilled jobs, although evidence on the size of this effect is mixed.
On Unemployment: Migrants may compete for some jobs, but they also create demand through their own spending, which can create new jobs. The net effect on unemployment is generally considered to be small.
Exam Preparation
- Crucial Distinction: Know the difference between unemployment as actively seeking work and economic inactivity as not seeking work. A fall in unemployment can be misleading if people become discouraged and leave the labour force.
- Categorise Causes: Be able to identify the type of unemployment from a scenario. This determines the most appropriate policy response, such as demand-side policies for cyclical unemployment and supply-side policies for structural unemployment.
- Evaluation: Unemployment statistics have limitations because they do not capture underemployment, the hidden economy, or regional variations. The Claimant Count versus LFS distinction is a common evaluation point.
- Link to Macroeconomics: Connect unemployment to output gaps, where cyclical unemployment indicates a negative output gap, and to fiscal policy, since higher unemployment raises benefit spending.