Unemployment: measurement, causes, consequences and policies

Last time

Before we start: last time, in Inflation, the CPI and monetary policy, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Without a job

Losing a job is one of the hardest things that can happen to a family. For the economy, it means workers who could be producing are not. In this lesson: who counts as unemployed, how it is measured, why it happens, and what governments do about it.

Who is unemployed

A person is unemployed if they are of working age, willing and able to work, and actively looking for work, but do not have a job. Students, retired people and those not looking for work are not counted. They are outside the labour force. The labour force is everyone employed plus everyone unemployed.

The unemployment rate

The unemployment rate is the number unemployed divided by the labour force, times 100. In one question, 0.62 million were unemployed in a labour force of 14 million. 0.62 divided by 14, times 100, is 4.4 per cent. The examiner said fewer than half got it right. Divide by the labour force, not the population, and remember the per cent sign.

Two ways to measure it

The claimant count counts the people claiming unemployment benefits from the government. The labour force survey asks a sample of households whether they are working, or looking for work. Both can be inaccurate. Some unemployed people cannot claim benefits, a survey sample may not represent everyone, and many people work in the informal economy, unrecorded.

Types of unemployment

Unemployment is grouped by its cause. Naming the type matters, because each type needs a different cure.

Frictional and seasonal

Frictional unemployment is the time people spend between leaving one job and starting another. It is usually short. Seasonal unemployment happens when work is only available at certain times of year, such as harvest work, or tourism in summer. Better job information, such as job centres and websites, cuts frictional unemployment.

Structural and cyclical

Structural unemployment comes from a long-term decline in an industry, so workers' skills are no longer wanted, for example when cheaper imports replace home textile mills. Cyclical unemployment comes from a fall in total demand in a recession. Firms sell less, so they need fewer workers. Structural unemployment can last a long time, because workers need new skills, or must move.

Consequences for workers

Unemployed workers lose income, so their living standards fall, and they may fall into poverty. The longer they are out of work, the more their skills fall behind, and the harder it is to get a job. There are also costs to health and family life, from stress and loss of confidence.

Consequences for the economy

Output is lost: the economy produces inside its PPC. The government collects less income tax and pays more in benefits, so its budget worsens. Spending falls, which can cause more job losses in other firms, and poverty and crime may rise.

Policies to reduce unemployment

For cyclical unemployment, raise total demand: fiscal policy, with more government spending or lower taxes, and monetary policy, with lower interest rates. For structural unemployment, supply-side policy: retraining, education, and help for workers to move to where the jobs are. For frictional unemployment, better information about vacancies. Subsidies for firms that hire workers can help with all types.

Do the unemployed stay unemployed?

They may find work quickly if the unemployment is frictional, if the economy is growing, or if their skills are in demand. They may stay unemployed long if it is structural, if they lack skills, cannot move, or if the economy is in recession. So the answer depends on the type and the state of the economy. Say that in your conclusion.

Mistakes that lose marks

Mistake one: dividing the unemployed by the whole population instead of the labour force. Mistake two: giving a policy without saying which type of unemployment it cures. Mistake three: describing consequences only for the worker, when the question asks about the economy. The fix: labour force on the bottom, type matched to policy, and the right group.

The full-marks tip

The full-marks tip: name the type of unemployment before you suggest a cure. In calculations, divide by the labour force, multiply by 100, and add the per cent sign.

On one card

So, on one card: unemployment. Keep it for revision.