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Topic 3.2
Low Unemployment
This topic covers the different types of unemployment (frictional, seasonal, cyclical and structural). You will also learn about how governments can measure it, including metrics like the Claimant Count. You will also evaluate whether unemployment is truly bad for economies.
- The use of labour to produce goods and services in an economy
- Active participation in the workforce
- Key macro-economic indicator
Employment
Measurement Methods
Number of People
Number of Jobs
Exam Tip
Remember the 1 hour/week rule: individuals are classified as employed if they worked at least 1 hour in the measured week.
Key Concepts
Full employment exists when there is no cyclical unemployment within the economy, so most of its workers are being used to produce an output.
Note: this doesn't mean that every single worker is employed, due to frictional employment (covered below). It is very hard to achieve due to the economic cycle that will bring booms and recessions and hence cyclical unemployment (also covered below)
The Labour Balance
Unemployed
Employed
Labour use generates GDP output.
KEY sTATS (UK)
Unemployment Rate = 4.9%
Employment Rate = 75.1%
Economically Inactive = 20%
Unemployment
Unemployment occurs when workers who are actively seeking work, of working age and who are willing and able to work at the current wage rates and unable to find employment.
It is important to note that people like pensioners, full-time students and those who choose to stay at home and look after kids are not unemployed - they are part of the inactive labour force (topic 2.7).
Measuring Unemployment
Claimant Count
Measuring unemployment according to the number of people who are claiming unemployment-related benefits such as the JSA (jobseekers' allowance). This is what the UK government uses
Level of Unemployment
The number of people in the working population who are unemployed.
Rate of Unemployment
The percentage of the active labour force that is unemployed, calculated by (number of unemployed/workforce) x 100.
Key points
- The Claimant Count is not the same as the unemployment rate, because some unemployed people do not claim JSA. For example, self-employed workers who are temporarily out of work may not claim benefits, while some people in the informal economy may continue to claim them. In addition, some people who receive JSA are not part of the active labour force, because they are not actually looking for work, such as discouraged workers
- A rise in unemployment levels does not necessarily mean the unemployment rate is rising, because the labour force may have grown faster. For example, unemployment can increase from 2.5 million to 2.7 million, but if the working population rises enough, the rate can still fall. Hence only a rise in the rate of unemployment signals slowing economic growth
- Unemployment causes government spending to rise as there will be more people claiming benefits, so the government could raise taxes to cover this budget deficit
Types of Unemployment
Frictional Unemployment
Occurs when workers are in-between jobs. This might be because they have just left school or university, or have chosen to leave one job to find another. It is often short-term and is seen as a sign of a healthy, flexible labor market.
Seasonal Unemployment
Occurs when demand for labor changes throughout the year due to seasonal patterns. For example, ski instructors in the summer or retail workers after the Christmas period. This is predictable and regular.
Structural Unemployment
A more serious form of unemployment caused by a mismatch between workers' skills and the needs of employers. This often happens due to technological changes or the decline of major industries in a country.
Cyclical / Demand-deficient
Caused by a lack of total demand in the economy, usually during a recession. As consumers spend less, firms produce less and require fewer workers. This is linked directly to the economic cycle.
Technological Unemployment
A sub-category of structural unemployment where automation or AI replaces human roles. While it increases efficiency, it requires the labor force to retrain for new types of interaction with technology.
Regional Unemployment
Occurs when unemployment is concentrated in specific geographic areas. This is often linked to the collapse of a regional industry, such as coal mining or steel production in parts of the UK.
Voluntary Unemployment
When workers choose not to accept a job at the current wage rate. This can be due to high welfare benefits or the desire to find a better-paying position (linked to frictional unemployment).
Evaluating the consequences of unemployment to individuals
Points
Evaluations
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Living standards - When workers become unemployed, they lose their wages. This means that they will lose their main flow of income. This means that they are forced to take benefits from the government, which is typically lower than their previous wage. This can cause hardship for their families and even themselves, because they can’t consume goods and services as much, so their living standard decreases.
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Taxes - If unemployment levels rise, then the government will have to spend more on benefits. This will mean that there will be a budget deficit. This means that government spending is more than the revenue they get, which would force them to raise taxes to reduce the deficit. This means that people will have less to spend which could decrease consumption and slow economic growth
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Retraining - However, if unemployment is temporary and the person receives generous welfare benefits or support from family, the impact on living standards may not be severe. Some individuals might use the time for retraining, leading to potentially higher earnings or job satisfaction in the future.
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The government could choose to simply spend more on education or job creation by using reserves or borrowing money. If the economy is in recession, then the unemployment rise is most likely cyclical (demand-deficient), which means that the government will need to stimulate demand through fiscal or monetary policies such as cutting taxes (to stimulate consumption) or decreasing interest rates (to increase disposable income). This can reduce the cyclical unemployment and also stimulate economic growth.
Evaluating the consequences of unemployment to producers
Points
Evaluations
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Training - Since the people who producers will hire will have been unemployed for a long time, they will have lost their skills. If there is structural unemployment, then their skills will be mismatched, which will also require retraining, which will cost additional spending, which will decrease profits and may force a loss.
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Less consumption - Due to there being less employment, more people are living off benefits from the government. This means that they are earning less than they could, which means that they can spend less on goods and services - a decrease in consumption. This means that the producers in the area make less revenue as less people buy from them. They may have to decrease prices to try and expand demand, which will lead to decreased profits, and potentially a loss.
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Low wage rates - The unemployment will suggest that there is an excess supply for labour. This means that there are a lot of people willing to do the same job, which means that demand and supply will be elastic. This allows them to spend less on wages as wage rates will hence be reduced due to the invisible hand in the labour market. This decreases their cost of production and leads to an increase in profits.
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The government will most likely use measures such as supply-side policies to reduce unemployment, such as training, education and job creation, all of which increase the productive capacity of the economy. The people in the region will gain new, more relevant skills that increase their human capital and make them more employable, which can open them to more employment opportunities.
Evaluating the consequences of unemployment to governments
Points
Evaluations
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When the economy is at full capacity, it is using all of the labour available, so there are no wasted resources. However, when unemployment is high, it leads to wasted resources. It signifies that the economy could be producing more than it is as well, which slows down economic growth. There is also less output as less labour is employed so less economic growth
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Taxes - If unemployment levels rise, then the government will have to spend more on benefits. This will mean that there will be a budget deficit. This means that government spending is more than the revenue they get, which would force them to raise taxes to reduce the deficit. This means that people will have less to spend which could decrease consumption and slow economic growth by shifting AD to the left which could create a cycle. Intergenerational inequality
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If this unemployment is mainly frictional unemployment, then this is actually good for the economy, because people with certain skills are being matched to the right job vacancies. In the long-run the labour force will become more productive and productive capacity will increase causing long-run economic growth
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The government could choose to simply spend more on education or job creation by using reserves or borrowing money. If the economy is in recession, then the unemployment rise is most likely cyclical (demand-deficient), which means that the government will need to stimulate demand through fiscal or monetary policies such as cutting taxes (to stimulate consumption) or decreasing interest rates (to increase disposable income). This can reduce the cyclical unemployment and also stimulate economic growth.