Key Definitions

Unemployed: A person of working age who is without work, available to start work within two weeks, and has actively sought work in the last four weeks under the ILO definition.

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.

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

Types and Causes of Unemployment

Structural: Caused by a long-term decline in an industry or a mismatch of skills, such as the decline of UK coal mining or automation. It often requires retraining.

Cyclical (Demand-Deficient): Caused by a fall in aggregate demand during a recession. Firms lay off workers as output falls.

Frictional: Short-term unemployment when people are between jobs or entering the labour market. It is inevitable in a dynamic economy.

Seasonal: Unemployment caused by the time of year, for example in tourism or agriculture.

Real Wage (Classical): Caused by wages being above the market equilibrium, for example due to strong unions or high minimum wages, which creates an excess supply of labour.

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.

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