Labour market concepts
Employment refers to the number of people in work, while unemployment is the number of people willing and able to work at current wage rates who cannot find employment. The unemployment rate is the percentage of the labour force that is unemployed.
Types of unemployment
| Type | Explanation | Possible remedies |
|---|---|---|
| Cyclical (demand‑deficient) | Occurs when aggregate demand falls during a recession, leading to job losses. | Expansionary fiscal or monetary policy to stimulate demand. |
| Structural | Arises from long‑term changes in the structure of the economy that eliminate certain jobs (e.g. decline of coal mining). | Education and retraining programmes; labour mobility schemes. |
| Frictional | Short‑term unemployment as workers transition between jobs. | Improved information and job matching services. |
| Seasonal | Jobs available only during certain seasons (e.g. tourism, agriculture). | Encouraging off‑season employment in other sectors. |
Consequences of unemployment
- Economic costs – lost output and income, lower tax revenues, higher welfare payments.
- Social costs – poverty, crime, stress and health problems.
- Hysteresis – long periods of unemployment may reduce workers’ skills and employability.
Policies to reduce unemployment
- Fiscal and monetary stimulus to boost aggregate demand and create jobs.
- Education and training to address skills mismatches and improve labour mobility.
- Reducing welfare traps and improving incentives to work.
- Supply‑side reforms to promote investment and entrepreneurship.
Examples and applications
The global COVID‑19 pandemic led to sharp rises in cyclical unemployment as lockdowns reduced demand for travel, hospitality and retail services. Governments mitigated job losses through wage subsidies and furlough schemes, illustrating the use of fiscal policy to support employment.
Structural unemployment can be seen in former coal‑mining regions where mines have closed and jobs have not been replaced. Re‑training programmes and incentives for new industries are needed to help displaced workers find alternative employment.
Countries with strong tourism industries often experience seasonal unemployment. For example, resorts may hire many workers during the peak summer season and reduce staff in winter. Diversifying the local economy with year‑round attractions can reduce seasonal fluctuations.
Calculation example
The unemployment rate is calculated as the number of unemployed people divided by the labour force (those in work plus those actively seeking work) multiplied by 100. For instance, if a country has 2 million unemployed people and a labour force of 20 million, the unemployment rate is (2 ÷ 20) × 100 = 10%. If the labour force rises to 22 million while unemployed people remain at 2 million, the unemployment rate falls to about 9.1%.
