4.6. Employment and unemployment
- Syllabus
- 0455–2027–2028
- Topic
- 4.6
- Level
- —
Learning objectives
4.6.1Definitions of employment, unemployment and full employment• Definitions of employment, unemployment and full employment4.6.2Measurement of unemployment• how unemployment is measured (labour force survey)• formula for the unemployment rate4.6.3Causes/types of unemployment• frictional unemployment• structural unemployment• cyclical unemployment• seasonal unemployment4.6.4Consequences of unemployment• consequences of unemployment for the individual, producers/firms, the government and the economy4.6.5Policies to reduce unemployment• the range of policies available to reduce unemployment and their effectiveness
Distinguish employment, unemployment and full employment
Employment, unemployment and full employment describe different positions in the labour market. The key distinction is whether a person has work and, if not, whether they are available and actively seeking it.
| Term | Meaning | Boundary |
|---|---|---|
| employment | people have paid work or are self-employed | a person can be employed full-time or part-time |
| unemployment | people have no job, are willing and able/available to work, and are actively seeking work at the current wage rate | students, retired people or carers not seeking work are economically inactive, not unemployed |
| full employment | the lowest achievable unemployment, with no cyclical unemployment and vacancies broadly matching jobseekers | it need not mean zero unemployment; frictional and some seasonal unemployment may remain |
Do not count every person without a job as unemployed. The actively-seeking-and-available test separates unemployment from economic inactivity.
Measure unemployment with a labour force survey
A labour force survey asks a sample of households about work status. It identifies people who are employed and people without work who are available and actively seeking work, then uses the sample to estimate national totals.
\text{unemployment rate}=\frac{\text{number unemployed}}{\text{labour force}}\times100%
The labour force equals employed people plus unemployed people. If 900,000 people are employed and 300,000 are unemployed, the labour force is 1,200,000 and the unemployment rate is 300,000/1,200,000×100=25%.
The denominator is the labour force, not the total population or everyone of working age. Survey results can be affected by sampling and by whether people report their status accurately, but benefit eligibility is not required for LFS unemployment.
Diagnose four types of unemployment
Classify unemployment by its cause, not just by how long it lasts. The diagnosis matters because each type needs a different response.
| Type | Cause | Recognition clue |
|---|---|---|
| frictional | people are temporarily between jobs or searching after entering the labour force | suitable vacancies exist, but matching/search takes time |
| structural | workers' skills or location no longer match available jobs because industries, demand or technology change | vacancies and unemployed workers coexist, but they do not match |
| cyclical | a recession or fall in total demand reduces firms' output and demand for labour | unemployment rises across many industries as the economy contracts |
| seasonal | demand for particular labour changes predictably during the year | work disappears in the same off-season, for example outside a harvest or tourist season |
Technological and regional unemployment are forms of structural unemployment. A school-leaver searching briefly is frictional; a worker displaced because their industry permanently declines is structural, even if both currently lack a job.
Trace the consequences of unemployment
Unemployment wastes labour and reduces income, so its effects spread from the unemployed person to firms, government finances and the whole economy.
| Affected group | Main causal consequences |
|---|---|
| individual | lost income lowers living standards and may cause poverty, debt, stress, ill health and loss of skills/confidence |
| producers/firms | lower household spending reduces demand, revenue, profit, output and economies of scale; some firms may find recruitment easier or face lower wage pressure |
| government | income, profit and spending-tax revenue fall while unemployment-benefit and support spending rise, worsening the budget position and creating opportunity cost |
| economy | real GDP and growth fall below potential, resources remain idle, poverty/inequality may rise, and prolonged unemployment can make skills obsolete |
A reinforcing chain can develop: job losses → lower household spending → lower firm sales → further cuts in output and employment. The severity depends on the type, duration and scale of unemployment and on available support or retraining.
Falling unemployment is usually beneficial, but it may create labour shortages and wage or price pressure near full employment. A lower measured rate can also reflect people leaving the labour force rather than finding work.
Match unemployment policy to its cause
A policy reduces unemployment most effectively when it targets the type causing it. Increasing total demand will not by itself correct a skills mismatch, while retraining may be too slow for a demand-led recession.
| Unemployment type | Targeted policies | Why they may work | Main limitation |
|---|---|---|---|
| frictional | better vacancy information, job-search support, carefully designed benefit/work incentives | shortens matching time and increases search effort | vacancies may still be unsuitable or distant |
| structural | education/retraining, infrastructure and mobility support, labour-market reform | aligns skills/locations with changing vacancies | long time lag, cost, and training may not match employer needs |
| cyclical | expansionary fiscal policy or monetary policy | higher total demand encourages firms to raise output and hire | may cause inflation, imports or debt; weak confidence can limit response |
| seasonal | retraining, diversification and support for alternative off-season work | creates employment when the seasonal activity is inactive | alternative demand and viable industries may be limited |
Judge effectiveness by diagnosis, available vacancies, worker mobility, confidence, spare capacity, time lag, fiscal cost and unintended effects. Investment can create jobs, but labour-saving capital may also produce technological unemployment. Use a policy mix when more than one type is present.