2.1.3 Employment and Unemployment

What is unemployment?

Unemployment is when people who are willing and able to work cannot find a job at the current wage rate.

What is employment?

Employment refers to people aged 16+ who are in paid work.

What is the unemployment rate?

The unemployment rate is the percentage of the labour force that is unemployed.

What is the labour force?

The labour force consists of people who are employed plus those actively seeking work.

What is the claimant count measure of unemployment?

The claimant count measures the number of people claiming unemployment-related benefits, mainly Universal Credit requiring job seeking.

What are advantages of the claimant count?

It is quick to collect, updated monthly, and provides recent data on unemployment trends.

What are disadvantages of the claimant count?

It understates unemployment because not all unemployed people qualify for or claim benefits.

Why may the claimant count be inaccurate?

Government rule changes and eligibility requirements can alter the number of claimants without actual unemployment changing.

What is the ILO measure of unemployment?

The International Labour Organisation measure counts people as unemployed if they are without work, available for work, and actively seeking work.

What data source is used for the UK ILO unemployment measure?

The UK Labour Force Survey (LFS) is used to calculate the ILO unemployment measure.

What is the Labour Force Survey?

The Labour Force Survey is a large survey of households used to collect employment and unemployment data in the UK.

What are advantages of the ILO measure?

It allows international comparisons and includes unemployed people who do not claim benefits.

What are disadvantages of the ILO measure?

It relies on survey responses which may be inaccurate or affected by sampling errors.

Why is the ILO measure generally higher than the claimant count?

Many unemployed people do not claim benefits but are still actively seeking work.

What is under-employment?

Under-employment occurs when workers are employed below their full capacity, such as working fewer hours than desired or in jobs below their skill level.

What is the difference between unemployment and under-employment?

Unemployment means having no job while actively seeking work, whereas under-employment means having a job but not using full labour potential.

Give an example of under-employment.

A graduate working part-time in a low-skilled retail job despite wanting full-time graduate employment.

Why is under-employment an economic issue?

It represents wasted labour resources and lower productivity in the economy.

What is the employment rate?

The employment rate is the percentage of working-age people who are in work.

Why is the employment rate significant?

A higher employment rate usually indicates stronger economic performance and higher incomes.

What is the unemployment rate?

The unemployment rate measures the percentage of the labour force without jobs but actively seeking work.

Why is the unemployment rate significant?

Rising unemployment indicates spare capacity and weaker economic activity.

What is the inactivity rate?

The inactivity rate measures the percentage of working-age people not seeking work and not available for work.

Who is included in the economically inactive population?

Students, retirees, discouraged workers, carers, and long-term sick people may be economically inactive.

Why is the inactivity rate important?

High inactivity reduces the productive capacity of the economy and increases dependency ratios.

Why might unemployment fall while inactivity rises?

People may stop searching for work and become economically inactive rather than employed.

What is structural unemployment?

Structural unemployment occurs when there is a mismatch between workers’ skills or location and available jobs.

What causes structural unemployment?

Changes in technology, globalisation, declining industries, and geographical immobility can cause structural unemployment.

Give an example of structural unemployment.

Coal miners losing jobs due to the decline of the coal industry and lacking skills for new industries.

Why can structural unemployment persist long term?

Workers may need retraining or relocation, which can take time and money.

What is frictional unemployment?

Frictional unemployment is short-term unemployment occurring when people move between jobs.

Why does frictional unemployment occur?

Workers may leave jobs voluntarily to search for better opportunities or take time entering the labour market.

Is frictional unemployment inevitable?

Yes, some frictional unemployment always exists in a dynamic economy.

What is seasonal unemployment?

Seasonal unemployment occurs when demand for labour changes at different times of the year.

Give examples of seasonal unemployment.

Agricultural workers after harvest season or tourism workers outside peak holiday periods.

What is demand deficiency unemployment?

Demand deficiency unemployment occurs when there is insufficient aggregate demand in the economy.

What is cyclical unemployment?

Cyclical unemployment is unemployment caused by economic downturns in the business cycle.

How are demand deficiency and cyclical unemployment linked?

Both occur due to falling aggregate demand during recessions.

Why does falling aggregate demand increase unemployment?

Firms experience lower sales and reduce output, causing redundancies.

Which sectors are most affected by cyclical unemployment?

Manufacturing and construction are often heavily affected because demand is income elastic.

What is real wage inflexibility unemployment?

Real wage inflexibility unemployment occurs when wages remain above the market equilibrium level, creating excess labour supply.

How can trade unions cause real wage inflexibility?

Trade unions may negotiate wages above equilibrium, reducing firms’ willingness to hire workers.

How can minimum wages contribute to unemployment?

If set above equilibrium, minimum wages may reduce demand for low-skilled labour.

How do efficiency wages create unemployment?

Firms may deliberately pay above-equilibrium wages to increase productivity, reducing labour demand.

What is occupational immobility of labour?

Occupational immobility occurs when workers lack the skills needed for available jobs.

What is geographical immobility of labour?

Geographical immobility occurs when workers cannot move to areas where jobs exist.

How can migration affect employment?

Migration can increase labour supply and help fill labour shortages.

How can migration reduce unemployment?

Migrants may create demand, start businesses, and fill skill shortages, boosting economic growth.

How can migration increase unemployment?

In some sectors, increased labour supply may increase competition for low-skilled jobs.

Why are skills important for employment?

Higher skill levels increase worker productivity and employability.

How does education reduce unemployment?

Education and training improve occupational mobility and help workers adapt to changing industries.

Why do low-skilled workers face higher unemployment?

Low-skilled jobs are more vulnerable to automation and international competition.

What are the effects of unemployment on consumers?

Consumers experience lower incomes, reduced confidence, and lower living standards.

What are the effects of unemployment on workers?

Workers may face stress, reduced self-esteem, skill deterioration, and poverty.

What is meant by skill deterioration during unemployment?

Long-term unemployment can cause workers’ skills to become outdated or less relevant.

What are the effects of unemployment on firms?

Firms may face lower demand for products and reduced profits.

How can unemployment reduce business investment?

Weak consumer demand discourages firms from expanding production.

What are the effects of unemployment on the government?

Government spending on benefits rises while tax revenue falls.

Why does unemployment worsen the government budget balance?

Lower income tax and VAT revenues combine with higher welfare spending.

What are the social effects of unemployment?

Higher crime rates, poorer mental health, social exclusion, and greater inequality may occur.

How can unemployment affect economic growth?

Unemployment means resources are underused, reducing actual output and economic growth.

What is long-term unemployment?

Long-term unemployment refers to people unemployed for more than 12 months.

Why is long-term unemployment especially damaging?

Skills may deteriorate and workers may become discouraged from seeking work.

What is youth unemployment?

Youth unemployment refers to unemployment among young people, typically aged 16–24.

Why is youth unemployment a concern?

It can reduce future earning potential and create long-term economic and social costs.

What policies can reduce structural unemployment?

Education, retraining schemes, apprenticeships, and improving labour mobility.

What policies can reduce frictional unemployment?

Improved job information, recruitment agencies, and faster hiring processes.

What policies can reduce cyclical unemployment?

Expansionary fiscal and monetary policies that increase aggregate demand.

What policies can reduce geographical immobility?

Housing market reforms and transport infrastructure improvements.

What policies can reduce occupational immobility?

Training programmes and investment in education.

What is full employment?

Full employment exists when everyone willing and able to work at the current wage rate can find employment, except those frictionally unemployed.

Why is zero unemployment impossible?

Some frictional and seasonal unemployment will always exist in a changing economy.

How does unemployment relate to spare capacity?

High unemployment indicates underused labour resources and spare productive capacity.

What is the natural rate of unemployment?

The natural rate of unemployment is the level of unemployment occurring when the labour market is in equilibrium, including frictional and structural unemployment.

What is hidden unemployment?

Hidden unemployment refers to unemployed people not counted in official statistics because they are not actively seeking work.

Why may official unemployment data underestimate true unemployment?

Hidden unemployment and under-employment may not be fully included in official figures.

How does automation affect unemployment?

Automation can increase structural unemployment by replacing workers with technology.

How can economic growth affect unemployment?

Economic growth usually increases labour demand and reduces cyclical unemployment.

What is derived demand for labour?

Demand for labour is derived demand because it depends on demand for the goods and services workers produce.

Why does recession increase unemployment?

Falling aggregate demand reduces firms’ revenues, causing layoffs and hiring freezes.

What is labour productivity?

Labour productivity measures output produced per worker or per hour worked.

How can higher productivity affect employment?

Higher productivity can increase competitiveness and economic growth, potentially increasing employment long term.

What is labour market flexibility?

Labour market flexibility refers to how easily labour markets adjust to changes in demand and supply.

How can flexible labour markets reduce unemployment?

Flexible wages and easier hiring and firing may help labour markets clear more quickly.

What is cyclical recovery unemployment?

Cyclical recovery unemployment occurs when unemployment remains high after a recession due to delayed hiring.

How can benefits affect unemployment?

Generous benefits may reduce incentives to seek work, although they also support living standards.

What is the replacement ratio?

The replacement ratio compares income received while unemployed to income received from employment.

Why might a high replacement ratio increase unemployment?

If unemployment benefits are close to wages from work, incentives to find jobs may weaken.

How does confidence affect unemployment?

Low business and consumer confidence reduces spending and investment, increasing unemployment.

What is regional unemployment?

Regional unemployment occurs when some areas experience persistently higher unemployment than others.

Why might some UK regions have higher unemployment?

Differences in industrial structure, investment, infrastructure, and skills can create regional disparities.

How can entrepreneurship reduce unemployment?

New businesses create jobs and increase labour demand.

Why is unemployment considered a macroeconomic problem?

It affects economic growth, inflation, public finances, and living standards across the whole economy.