Employment & Unemployment (Edexcel A Level Economics A)

Measures of Unemployment

• Someone is considered unemployed if they are not working but actively seeking work

  • They are part of the labour force and in the population of working age

• 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 between 16-65 and not working or not seeking work, e.g. early retired

• 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 and the Claimant Count

The Distinction Between Unemployment & Underemployment

• Unlike the unemployed, people who are underemployed are working

• Someone is underemployed when:

  • They want to work more hours than they currently work

  • They are working in a job that requires lower skills than they have e.g. an architect working as a gym instructor

• Underemployment is often a response to cyclical unemployment

  • Workers who have lost their jobs in a weak economy are willing to take part-time jobs or accept roles outside of their main skill base

• Underemployment is also a consequence of structural unemployment

  • Unless workers retrain and gain new skills, it will be hard for them to gain full employment

The Significance of Changes to Employment, Unemployment & Inactivity Rates

Four Metrics Are Commonly Used When Analysing the Labour Market in an Economy

• The employment rate could be increasing even as the unemployment rate is increasing:

  • May be caused by increased immigration which causes working age population to increase

  • May be caused by a decrease in the inactivity rate as people move from inactive to employed

• Unemployment rates do not capture the hidden unemployment that occurs in the long term

  • Workers look for a job but may eventually give up and become economically inactive

  • This actually improves the unemployment rate as fewer people are actively seeking work

The Causes of Unemployment

• Structural unemployment occurs when there is a mismatch between jobs and skills in the economy

  • It usually happens as the structure of an economy changes e.g. the secondary sector is declining and the tertiary sector is growing

  • There is no longer a need for a specific type of worker e.g. ship builders in Glasgow

  • Many Western industries have relocated production to China causing structural unemployment in their economies

  • Unless workers receive help to retrain, they are often left unemployed or under-employed

• Cyclical or demand deficient unemployment is caused by a fall in AD in an economy

  • This typically happens during a slow down or recession

  • The demand for labour is a demand derived from the demand for goods/services

  • As output falls in the economy, firms lay off workers

• Seasonal unemployment occurs as certain seasons come to an end and labour is not required until the next season

  • E.g. fruit pickers; summer seaside resort workers; ski instructors

• Frictional unemployment occurs when workers are between jobs

  • This is usually short-term unemployment

  • Workers have voluntarily left their previous job to search for another

• 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

The Significance of Migration On Employment/Unemployment

• Labour is a key factor of production and one way to expand output in an economy is to increase the amount of labour available

  • This is often achieved through easing the inward migration policies (immigration)

• The UK has experienced significant immigration since the 1990's, especially from Eastern Europe

• Net migration is the difference between inward migration and outward migration (emigration)

  • Less developed economies generally have net outward migration

  • More developed economies generally have net inward migration

  • More developed economies usually have skilled workers emigrating

Significance on employment

• The immigrants usually fill vacancies that the local citizens cannot (or will not) fill

  • These tend to be manual labour, dangerous, and low skilled jobs

• The increased supply of labour may push down wages in the economy, especially for low skilled jobs

  • Lower average wages are an incentive for employers to hire more workers

  • Employment may increase as a result

• Immigration results in an increased population, which increases consumption in the economy

  • Greater output requires more labour so it creates more jobs

Significance on unemployment

• Immigrants may displace some local workers, increasing the level of unemployment

• Dependents of immigrants may be unable to find work and register as unemployed

The Effects of Unemployment

• The effects of unemployment, especially long-term unemployment, are extremely damaging

  • There are impacts on the individual, the economy, the government, and firms

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