Employment and unemployment
Employment means people are working and producing goods or services. Unemployment means people are willing and able to work, but they cannot find a job. This chapter explains how employment changes, how unemployment is measured, why unemployment happens, and how governments try to reduce it.
1. Key definitions
Employment
The number of people who have jobs. Employed people may work full-time, part-time, or be self-employed.
Unemployment
People are unemployed when they are willing and able to work, actively looking for work, but cannot find a job.
Full employment
Full employment means almost everyone who wants a job can find one. It does not mean zero unemployment, because some people will always be between jobs.
2. Changing patterns and levels of employment
The number and type of jobs in an economy can change over time. These changes are called changing patterns of employment.
| Change | Simple explanation | Example |
|---|---|---|
| Employment sector | Employment can move between the primary, secondary and tertiary sectors. | More people may work in services such as banking, education, healthcare and tourism. |
| Delayed exit from the workforce | Some workers stay in employment for longer before retiring. | People may work past retirement age because they are healthier or need more income. |
| Ageing population | A larger share of the population is older, which can affect the size and age structure of the labour force. | Governments may encourage older people to stay in work for longer. |
| Formal sector employment | Formal jobs are registered, taxed and protected by labour laws. | A worker in a registered company with a contract and legal rights. |
| Female participation rate | This shows the percentage of women who are working or actively looking for work. | Better education, changing attitudes and childcare support can increase female participation. |
3. Measuring unemployment
Unemployment can be measured in two common ways:
Claimant count
This counts people who are claiming unemployment benefits. It is simple, but it may miss unemployed people who do not claim benefits.
Labour Force Survey (LFS)
This uses survey questions to estimate how many people are unemployed. It can include people who are looking for work but not claiming benefits.
Unemployment rate
The unemployment rate shows the percentage of the labour force that is unemployed.
Example: If 500,000 people are unemployed and the labour force is 10,000,000:
Unemployment rate = 500,000 ÷ 10,000,000 × 100 = 5%
4. Causes and types of unemployment
| Type | Meaning | Simple example |
|---|---|---|
| Frictional unemployment | Short-term unemployment when people are between jobs or looking for their first job. | A teacher leaves one school and spends a few weeks finding another job. |
| Structural unemployment | Unemployment caused by long-term changes in the economy. Workers may not have the skills needed for new jobs. | Factory workers lose jobs because production becomes automated or moves abroad. |
| Cyclical unemployment | Unemployment caused by a fall in total demand during a recession or downturn. | Restaurants, hotels and shops hire fewer workers when consumers spend less. |
How to read the graph: aggregate demand falls from AD₁ to AD₂. National income falls from Y₁ to Y₂, and the general price level falls from P₁ to P₂. Because firms are selling less, they need fewer workers, so unemployment rises.
5. Consequences of unemployment
- Lower output: the economy produces fewer goods and services because some workers are not being used.
- Lower incomes: unemployed people usually have less income, so their standard of living may fall.
- Higher government spending: the government may spend more on unemployment benefits and support programmes.
- Social problems: long-term unemployment can increase stress, poverty and family difficulties.
6. Policies to reduce unemployment
Governments can use different policies depending on the type of unemployment.
| Policy | How it can reduce unemployment | Best suited for |
|---|---|---|
| Fiscal policy | The government can increase spending or reduce taxes to raise demand. Firms may then produce more and hire more workers. | Cyclical unemployment |
| Monetary policy | The central bank can lower interest rates to encourage borrowing, investment and spending. This can increase demand for labour. | Cyclical unemployment |
| Supply-side policies | Training, education, better job information and incentives to work can help workers gain skills and move into available jobs. | Structural and frictional unemployment |
How to read the graph: if interest rates fall, consumers and firms may spend and invest more. Firms then need more workers, so demand for labour shifts right from DL₁ to DL₂. Employment rises from N₁ to N₂, and the real wage rate may rise from W₁ to W₂.
Quick exam method
- Define the key term, such as unemployment or full employment.
- Identify the type of unemployment: frictional, structural or cyclical.
- Give an example to show understanding.
- Choose a suitable policy and explain how it reduces unemployment.
Quick summary
- Employment means people have jobs; unemployment means people want work but cannot find it.
- Unemployment can be measured using the claimant count or Labour Force Survey.
- Frictional unemployment is short-term, structural unemployment is caused by economic change, and cyclical unemployment is caused by falling demand.
- Unemployment can reduce output, incomes and living standards.
- Fiscal, monetary and supply-side policies can reduce unemployment in different ways.