Measure unemployment
Use workforce, participation and unemployment data correctly and calculate the unemployment rate.
Unemployment
Full employment is an important macroeconomic objective, but even an economy operating close to full capacity will normally have some unemployment. This chapter explains how unemployment is measured, why measurement is difficult, the main causes and types of unemployment, and its economic and social consequences.
ILO unemploymentParticipation rateMeasurementTypes of unemploymentFull employmentConsequences
What this chapter prepares you to do
Judge the data
Explain why claimant counts, surveys, informal activity and underemployment can make unemployment difficult to measure.
Identify the cause
Distinguish frictional, structural, technological, cyclical and seasonal unemployment from the situation described.
Evaluate the consequences
Analyse effects on workers, firms, government finances, output and society, while recognising that some frictional unemployment can help labour reallocation.
High-grade habit: do not say that “full employment” means zero unemployment. A dynamic economy normally contains some job search and other unemployment even when resources are being used effectively.
Chapter sections
9.1
The meaning and measurement of unemployment
Unemployment represents underutilisation of labour. If an economy is operating inside its PPC, some productive resources are not being fully used. In an AD/AS framework, a fall in aggregate demand can move real GDP below the full-employment level and create unemployment in the short run.
The working population and workforce
The working population is the population of working age. The textbook normally uses ages 16–64, while noting that official age limits vary across countries. Not everyone of working age is economically active.
Economically active / workforce
People who are either employed or unemployed and therefore participate in the labour market.
Employed
People working for firms or other organisations, together with the self-employed.
Unemployed
Economically active people who do not have a job.
Economically inactive
People of working age who are not looking for work, such as some students, retired people, carers and discouraged workers.
Working population= economically active + economically inactive
Workforce / economically active population= employed + unemployed
Participation rate= (economically active ÷ working population) × 100
Discouraged workers
A discouraged worker has been unable to find employment and has stopped looking for work. Such a person is counted as economically inactive rather than unemployed, even though lack of job opportunities may be the reason for leaving the workforce.
The ILO definition
For international comparison, unemployment is commonly based on the International Labour Organization approach. A person is treated as unemployed when they are without work, available for work and seeking work.
Unemployment rate= (number unemployed ÷ workforce) × 100
Worked example
An economy has 4.8 million employed people and 0.2 million unemployed people.
Workforce = 4.8 + 0.2 = 5.0 million
Unemployment rate = (0.2 ÷ 5.0) × 100 = 4%
The denominator is the workforce, not the total population.
Claimant count and Labour Force Survey
A claimant count records people registered for unemployment-related benefits. It can be useful administratively, but it does not perfectly measure unemployment. Some claimants may not genuinely be available for work, while some people who are looking for work may not qualify for benefits and therefore are not counted.
A Labour Force Survey can be designed to follow the ILO definition more closely by identifying people who are without work, available and actively seeking employment.
Why unemployment is difficult to measure
Survey problems
Reliable labour-force surveys are costly and can be difficult to conduct, especially across large or remote areas.
Informal activity
Large informal sectors and subsistence activity make it harder to classify people accurately as employed, unemployed or inactive.
Discouraged workers
People who stop looking for work move out of the measured workforce even if poor job prospects caused their decision.
Underemployment
People may have jobs but work fewer hours than they want or work in occupations that underuse their qualifications and skills.
Measurement point — underused labour can be hidden: A person can count as employed but still be underused. The book gives the examples of someone who can obtain only part-time work despite wanting more hours, or a graduate working in a job that does not use their qualifications. Headline unemployment therefore does not capture every form of labour underutilisation.
Full employment does not mean zero unemployment
Even when an economy is operating at its effective full-employment level, there will normally be people changing jobs or searching for work. The exact unemployment rate consistent with full employment cannot be fixed for every country and period because labour-market flexibility differs.
Exam warning: a fall in unemployment is not automatically evidence of more people finding jobs. The measured rate can also fall if people stop looking for work and become economically inactive.
9.2
Causes of unemployment
Frictional unemployment
Short-term unemployment associated with job search and movement between jobs.
Structural unemployment
Unemployment caused by changes in the pattern of economic activity that create a mismatch between workers' skills or location and available jobs.
Technological unemployment
A form of structural unemployment arising when workers do not have the skills required by new technology.
Cyclical unemployment
Unemployment caused by a downturn in economic activity when real GDP falls below the full-employment level.
Seasonal unemployment
Unemployment caused by predictable seasonal changes in demand for labour.
Easy examples — identifying the type: A worker leaving a job to search for a better one is frictionally unemployed. A coal miner who cannot immediately move into a growing financial-services occupation illustrates structural unemployment. A worker whose skills are made obsolete by unfamiliar new machinery illustrates technological unemployment. Workers losing jobs during a recession face cyclical unemployment, while tourism workers without work in the quiet season face seasonal unemployment.
Frictional unemployment
Workers may voluntarily leave one job to search for another that offers better pay or prospects. Search takes time, particularly when information about vacancies is incomplete. Some frictional unemployment is therefore normal in a changing economy.
Structural and technological unemployment
As consumer demand, comparative advantage and production methods change, some sectors expand while others contract. Workers leaving declining sectors may not possess the skills required in expanding sectors. Retraining may take considerable time, so structural unemployment can be persistent.
Technological unemployment is a specific example: new production methods can make some existing skills obsolete while increasing demand for different skills.
Cyclical unemployment
During a recession or other downturn, aggregate demand can be too weak to support the full-employment level of output. Firms reduce production and labour demand, creating cyclical unemployment.
Seasonal unemployment
Some industries have predictable peaks and troughs in activity. Tourism, agriculture and other seasonal industries may require fewer workers during part of the year.
Migration and unemployment
The effect of immigration depends on the characteristics of migrant workers. If their skills complement those of domestic workers, migration can raise output and labour demand. If migrants are close substitutes for some domestic workers, there may be downward pressure on wages or displacement in particular labour markets. The outcome therefore depends on skills and the labour-market context rather than migration alone.
Classification technique: first identify the trigger. Job search → frictional; changing industries/skills mismatch → structural; new technology → technological; recession/weak AD → cyclical; time of year → seasonal.
9.3
Consequences of unemployment
The seriousness of unemployment depends partly on its type and duration. Short periods of frictional unemployment are very different from long-term structural or cyclical unemployment.
Individuals and households
Unemployed workers lose earnings and may become dependent on social-security support. Long spells can also reduce confidence, dignity and wellbeing.
Lost output
If workers who want jobs are unemployed, the economy operates below capacity and sacrifices output that could otherwise have been produced.
Government finances
Income-tax receipts fall while spending on unemployment-related benefits may rise, worsening the government's budget position.
Firms
Weak demand and high unemployment may reduce firms' sales and profits and discourage investment.
Long-term unemployment and deskilling
When unemployment persists, skills can become outdated and people may become detached from the labour market. This makes it harder to return to employment and can make unemployment more persistent.
Wider social consequences
Long-term unemployment may contribute to poverty, low morale and social unrest. The textbook also notes possible links with crime and vandalism. These effects impose costs beyond the individual unemployed worker.
Possible benefit of frictional unemployment
Not every period of unemployment is necessarily harmful. When a worker spends time searching and moves into a job that better matches their skills, the allocation of labour can improve. Frictional unemployment can therefore be part of the process by which a dynamic economy reallocates workers.
Why duration matters
A short period between jobs may have limited costs and can lead to a better match. Long-term unemployment is generally more serious because lost income accumulates, skills deteriorate and re-entry into work becomes harder.
Evaluation point: avoid treating all unemployment as identical. The consequences depend on the cause, duration, availability of benefits, the state of the economy and whether workers can retrain or move into expanding sectors.
Why the duration matters in practice: A short spell of frictional unemployment while a worker searches for a better-matched job may improve labour allocation. Long-term structural unemployment is much more serious because income is lost for longer, skills can become outdated and the worker may become increasingly detached from the labour market.
Chapter 9 revision checklist
Explain unemployment as underutilisation of labour.
Relate unemployment to a point inside the PPC.
Relate cyclical unemployment to output below full employment.
Define the working population.
Distinguish economically active and economically inactive people.
Define employed and unemployed.
Define discouraged workers.
Calculate the participation rate.
State the ILO conditions for unemployment.
Calculate the unemployment rate correctly.
Explain limitations of claimant-count data.
Explain why Labour Force Surveys are used.
Discuss cross-country measurement difficulties.
Explain underemployment and hidden underuse of labour.
Explain why full employment does not mean zero unemployment.
Distinguish frictional and structural unemployment.
Explain technological, cyclical and seasonal unemployment.
Explain how migration may affect labour markets.
Analyse economic and social costs of unemployment.
Explain why long-term unemployment is particularly costly.
20 questions. Each answer is marked immediately with a short explanation of why it is correct or incorrect.