Unemployment and Labour Force Concepts – Chapter 10

Labour force

All people aged 15 + who are either employed or actively seeking work.

Participation rate

The percentage of the working-age population that is in the labour force.

Participation rate formula

Labour force / Population aged 15

Unemployment rate

The proportion of the labour force willing and able to work but has not held paid work for at least one paid hour per week.

Unemployment rate formula

Number unemployed / Labour force

Unemployment

People who are willing and able to work but have not held paid work for at least one paid hour a week.

Underemployment

People who hold a paid job, but would like to work more hours per week

Underutilisation rate

Combined percentage of the labour force that is unemployed or underemployed.

Voluntary unemployment

Occurs when a worker chooses to leave a job to search for another.

Involuntary unemployment

Occurs when a worker is laid off or dismissed by an employer.

Frictional unemployment (aka Search Unemployment)

Short-term, voluntary unemployment naturally caused by people moving between jobs or entering the labour market (e.g. different locations or better pay)

Structural unemployment

Long-term unemployment created by mismatches between workers’ skills/location and employers’ needs, often due to technology or industry change. Jobs with routine tasks are at risk. Can impact older workers or whole regions. Over time, the demand-generation effect of structural change should outweigh its displacement effects, but this depends on the pace of change.

Cyclical unemployment

Unemployment that rises and falls with the business cycle because labour demand derives from overall economic activity. (demand for G+S). Building/construction, retail and hospitality jobs are harder to find when economic activity is low.

Natural rate of unemployment (UN)

the minimum level of unemployment that can be sustained given current labour market conditions (frictional + structural). Cyclical unemployment =0

GDP gap

The lost output when actual GDP falls short of potential GDP due to under-utilised labour and other resources.

Direct cost of unemployment

Value of lost output and income represented by the GDP gap (e.g. approx 3 % of GDP in March 2022).

Welfare cost of unemployment

Government transfer payments to support jobless people, such as Job Seeker benefits.

Social cost of unemployment

Non-economic harms like reduced self-esteem, family stress, and weakened community ties from long-term unemployment.

Labour underutilisation

the extent to which available human resources are not being fully utilized. (unemployment + underemployment)

Current unemployment rate

4.3% as of June 2025