Unemployment

What is Unemployment?
Unemployment is when a person who is willing and able to work cannot find a job.
Labour force and participation rate
The labour force is the number of people in the economy that are employed and
unemployed; people who are willing and able to work.
The labour force participation rate is the proportion of people in the working age
population who are either working or actively seeking work.
The level and rate of unemployment
The level of unemployment is the total number of people in the economy that are
unemployed.
The rate of unemployment is the percentage of unemployed workers out of the labour
force. It is given by the formula:
Measures of unemployment
The government has two main methods of measuring unemployment:
Claimant count measure: This measure counts the number of people who register as
unemployed in order to claim unemployment benefits.
Labour force survey measure: this involves conducting a survey to ask people if they are
employed, unemployed, or economically inactive (not in the labour force).
It is more widely used than the claimant count measure because it uses the International
Labour Organization (ILO) definition of unemployment - all people of working age who,
in a specified period, are without work, but who are available for work in the next two
weeks and who are seeking paid employment.
Difficulties in measuring unemployment
Claimant count measure: This method may be Labour force survey measure: This method of data
quick and easy to calculate but it may include some collection is more expensive and time consuming
people who are not really unemployed (employed than the claimant count. Also, as the data collected
people who illegally receive benefits and people are from a sample survey, they are subject to
without jobs that aren’t actively seeking work) and sampling error (when the characteristics of the
exclude those that are genuinely unemployed. It may sample does not reflect that of the entire population)
also exclude those that choose not to receive and other practical data collection problems.
benefits, full-time students, elders/minors, and
people whose unemployment income is too high.
Causes of unemployment
● A person leaves school or university to seek work
● A person being made redundant
● Voluntarily leaving a job
● Improved health allowing a person to look for work
● A person stops being a homemaker (someone who stays at home to take care of
children)
● Immigrants into a country seeking work
Note: there are more ways to enter and leave unemployment than leaving employment or
getting a job.
Types of unemployment
Unemployment is divided into three main types: frictional, structural and cyclical.
Frictional unemployment is temporary and occurs when a person is between jobs.
Structural unemployment is unemployment caused by changes to the structure of the
economy. Demand for one product falls and rises for another, causing some workers to
become redundant.
Cyclical unemployment or demand-deficient unemployment is unemployment caused
by a lack of aggregate demand.
Frictional unemployment
There are four types of frictional unemployment:
Voluntary unemployment is when a worker is deliberately unemployed because they
refuse to accept jobs at the going wage rate.
Search unemployment is when a worker takes time to look for a job they are willing to
accept.
Casual unemployment is when people have left one short-term job and before they find
another short-term job e.g. actor, construction workers.
Seasonal unemployment is that which arises at times of the year when demand for a
product falls e.g. lifeguard, ice-cream salesperson.
Structural unemployment
This type of unemployment can take a number of forms:
Regional unemployment: when job vacancies decline in a particular area of the country
e.g. declining coffee demand for coffee could result in the decline in the coffee growing
industry in Eastern Uganda.
Technological unemployment: unemployment caused by advances in technology e.g.
drones delivering Amazon packages.
International unemployment: occurs when workers lose their jobs because demand
switches from domestic industries to more competitive international industries. For
instance, the decline of Chicken Tonight in favour of the international restaurant Kentucky
Fried Chicken.
Cyclical unemployment
Since cyclical unemployment occurs due to a lack of aggregate demand, it can be
attributed to economic recessions. It affects the whole economy, with job losses occurring
across a range of industries.
The graph shows the labour market initially in equilibrium at wage rate W. Then as a
result of a fall in aggregate demand, firms reduce output and aggregate demand for labour
shifts to ADL. If workers resist wage cuts, demand-deficient unemployment XQ will exist.
Consequences of unemployment
Unemployment has consequences for the unemployed themselves, firms and the economy as a whole.
Unemployed workers may experience a decline in income. They may also find it harder to get a job the longer
they are unemployed because they may miss out on training, become out of touch with technological
advances, and/or lose confidence. Their physical and mental health may also decline after a long period of
unemployment. Few people may find a job that pays more and they enjoy.
Firms wanting to expand may have a greater choice of potential workers. Frictional unemployment allows the
economy to respond quicker to changes in demand and supply conditions. Firms may also benefit from
workers not requesting wage rises in fear of losing their jobs. Firms may, however, suffer from lower demand
for their goods and services.
Output will be below its potential level. Tax revenue received by the government will be lower than with a
higher level of employment. If the government pays state benefits, there will be more spending on the benefits
which could have been put to other purposes.
Policy measures to address unemployment
Supply side measures: Demand side measures:

● Education and training to solve ● Monetary policy - cutting interest rates to

occupational immobility. increase AD
● Geographical subsidies to help workers and ● Fiscal policy - cutting tax/higher spending to
firms move. boost AD
● Employment subsidies to encourage firms
to take on the long-term unemployed