Employment & Unemployment (AQA A Level Economics)

• Someone is considered to be unemployed if they are not working but actively seeking work
  • They are part of the labour force
    
    
• A country's population is divided into the labour force and non labour force
  • The labour force consists of all workers actively working and the unemployed (who are seeking work)
    • Usually between the ages of 16-65
  • The non labour force includes all those not seeking work e.g. stay at home parents, pensioners, school children
    • Economically inactive are those people who are between 16-65 and not working or not seeking work
      
      
• Unemployment in the UK is measured using two different approaches
  • The International Labour Organisation (ILO) Survey
  • The Claimant Count
    

The Differences Between the ILO Labour Force Survey & the Claimant Count

The concepts of voluntary and involuntary unemployment  

• Involuntary unemployment occurs when workers are willing to work at the current market wage rates but there are no jobs available 
  • This type of unemployment is often associated with economic downturns, recessions, or structural shifts in industries.
    
    
• Voluntary unemployment occurs when workers choose to remain unemployed and reduce job offers at current market wages 
  • Eg. Waiting for a better job opportunity or taking a break to travel 

• There are specific causes of unemployment
• They can generally be classified according to four different types

Types of Unemployment

Unemployment caused by demand and supply side factors 

• Demand-side unemployment is caused by a lack of aggregate demand in the economy and this is often related to a recession in the economic cycle
• Frictional and structural unemployment emerge from factors affecting the supply side of the economy 
• The appropriate government interventions to alleviate different types of unemployment depend on whether they stem from demand-side or supply-side factors
  
  

Government Response to each type of Unemployment

• Real wage unemployment occurs when wages are inflexible at a point higher than the free-market equilibrium wage
  • Usually caused by the existence of minimum wage laws
  • The higher wage creates an excess supply of labour
  • This excess supply represents real wage unemployment

Diagram: Real Wage Unemployment

Labour market diagram illustrating real wage unemployment caused by the imposition of a minimum wage

Diagram analysis

• Equilibrium employment occurs when demand for labour equals the supply of labour 
  • This determines the equilibrium real wage rate (W_e) and quantity (Q_e)
    
• If wages are fixed above the equilibrium (W₁), more workers will supply labour (Qs of labour)
• Fewer firms are willing to pay the higher wage, therefore demand for labour falls to Qd for labour
• At this point, quantity supplied of labour is greater than quantity demanded of labour (Qs > Qd)
• This leads to an excess supply of labour, creating real-wage unemployment
   
• Free market economists argue that, in a competitive labour market, real wage unemployment should be temporary
  • Competitive forces are expected to bring down the real wage to W_e, eliminating the excess supply of labour and restoring full employment 
  • However, if labour market rigidity or ‘stickiness’ exists, often caused by factors like trade union power, that prevents real wages from falling below W₁, the market mechanism may fail to clear excess supply

• Full employment does not mean that everyone in the working population is willing to work
  • There will always be people moving between jobs (frictional unemployment) or a level of structural unemployment 
  • Frictional and structural unemployment make up what is called equilibrium unemployment 
  • Equilibrium unemployment exists when the economy’s aggregate labour market is in equilibrium. It is the same as the natural level of unemployment

Diagram: The Natural rate of Unemployment

Labour market diagram illustrating the natural rate of unemployment, which is the difference between Q₁ and Q_FE

Diagram analysis

• Q₁ indicates the number of workers willing to work at the full employment real wage rate W_FE
• Q_FE is the ‘full employment’ level of employment
  • Q_FE includes those workers willing to work, plus the number of workers who are structurally and cyclically unemployed
• The natural rate of unemployment is the difference between between Q₁ and Q_FE
• The distance between AS_L and the curve AS_L1 shows the amount of frictional and structural unemployment in the economy at the full employment wage rate W_FE, namely the number of workers who are willing and able to work at this wage rate

• The effects of unemployment, especially long-term unemployment, are extremely damaging
  • There are impacts on the individual, the economy, the government, and firms

Diagram: The Effects of Unemployment

Long-term unemployment affects individuals, the economy, government, and firms