Understanding Unemployment (Cambridge (CIE) A Level Economics): Revision Note

The meaning of unemployment

• Unemployment occurs when individuals who are willing and able to work at the current wage rate are unable to find employment

• The unemployed are part of the labour force (also called the working population)

  • They are actively seeking work but do not currently have a job

• Unemployment is distinct from economic inactivity - those who are neither employed nor actively seeking work, such as full-time students, stay-at-home parents, or those who have given up looking for work, are not counted as unemployed

• The unemployment rate is expressed as a percentage of the labour force:

Measures of unemployment

1. The claimant count

• The claimant count measures unemployment by counting the number of people claiming unemployment-related benefits - in the UK this is Universal Credit

  • It is cheap and straightforward to compile as the data is automatically generated by the benefit system

Difficulties with the claimant count

• Understates true unemployment - not all unemployed people claim benefits; some do not qualify due to savings, a partner's income, or immigration status

• Overstates true unemployment - some claimants may be working in the informal economy while claiming

• Changes in eligibility rules affect the count independently of actual unemployment levels - making comparisons over time unreliable

• Does not count those working part-time who want full-time work (underemployment)

2. The Labour Force Survey (LFS)

• The LFS measures unemployment using a household survey based on the International Labour Organisation (ILO) definition - a person is unemployed if they are without work, available to start work within two weeks, and have actively sought work in the past four weeks

  • It is internationally standardised, allowing comparisons between countries

Difficulties with the LFS

• Based on a sample - subject to sampling error and may not accurately reflect the full population

• Relies on self-reporting - respondents may misrepresent their situation

• Does not capture underemployment - those in part-time or low-skilled work who want more or better-paid employment

• The ILO definition excludes discouraged workers - those who have stopped looking for work because they believe no jobs are available, even though they want to work

Causes and types of unemployment

1. Frictional unemployment

• Frictional unemployment occurs when workers are between jobs

  • They have left one job and are searching for another

• It is short-term and voluntary in nature - the worker is employable but the process of job search takes time

• It exists in all economies because information about job vacancies and available workers is not perfect

• Example: a marketing manager who has resigned and is searching for a new role

2. Structural unemployment

• Structural unemployment occurs when there is a mismatch between the skills workers have and the skills employers demand

  • Caused by long-run changes in the structure of the economy

• It arises when declining industries shed workers whose skills are not transferable to growing industries

• It tends to be long-term and geographically concentrated in areas dependent on a single industry

• Example: former steel workers in South Wales or coal miners in northern England whose skills have little value in a service-based economy

3. Cyclical unemployment

• Cyclical unemployment (also called demand-deficient unemployment) occurs when there is insufficient aggregate demand in the economy to employ all those willing and able to work

  • It rises during recessions as firms cut output and lay off workers, and falls during periods of economic growth

• It is the most economically damaging type - large numbers of workers can become unemployed simultaneously

• In AD/AS terms it occurs when the economy is operating below full employment output on the Keynesian LRAS

4. Seasonal unemployment

• Seasonal unemployment occurs when demand for labour falls at certain times of year due to the seasonal nature of some industries

  • It is predictable and temporary - workers in affected industries expect periods of unemployment

• Example: agricultural workers after harvest, ski resort staff outside the winter season, or tourism workers in off-peak periods

5. Technological unemployment

• Technological unemployment occurs when workers are displaced by new technology that replaces human labour in the production process

  • It is a form of structural unemployment - the skills of displaced workers may not be transferable to the new jobs created by technological change

  • For example: automation of manufacturing assembly lines, self-service checkouts replacing retail workers, or AI tools reducing demand for routine data processing roles

A summary of unemployment types

Consequences of unemployment

Consequences for individuals

• Loss of income - unemployment reduces household income, lowering living standards and potentially pushing individuals into poverty

• Skills deterioration - prolonged unemployment leads to the depreciation of human capital as skills become outdated or underused

• Mental and physical health - unemployment is associated with increased rates of anxiety, depression and poor physical health

• Hysteresis - long-term unemployment makes individuals less employable over time, as employers interpret prolonged unemployment as a negative signal

Consequences for the economy

• Lost output - unemployed workers are a wasted productive resource; the economy produces below its potential, creating a negative output gap

• Reduced tax revenues - fewer people in work means lower income tax and National Insurance receipts for the government

• Higher government spending - unemployment benefit payments rise, increasing pressure on public finances

• Multiplier effects - unemployed workers have lower incomes and spend less, reducing aggregate demand and potentially causing further unemployment - a self-reinforcing downward spiral

Consequences for society

• Increased inequality - unemployment disproportionately affects lower-skilled workers, widening income and wealth inequality

• Social costs - higher unemployment is associated with increased crime rates, family breakdown and social unrest in affected communities

• Regional disparities - structural and technological unemployment tends to concentrate in specific regions, creating persistent geographical inequality