Employment & Unemployment (Edexcel A Level Economics A)

Revision Note

Steve Vorster

Written by: Steve Vorster

Reviewed by: Jenna Quinn

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 so are economically active

  • 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, schoolchildren, and students

      • Economically inactive are those between 16 and 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 ILO and UK Labour Force Survey

The Claimant Count

  • An extensive survey is sent to a random sample of ≈ 60,000 UK households every quarter

  • Respondents self-determine if they are unemployed based on the ILO criteria

    • Ready to work within the next two weeks

    • Have actively looked for work in the past one month

  • The same survey is used globally so it's useful for making international comparisons

  • Counts the number of people claiming job seekers allowance (JSA) in the UK

  • More stringent requirement to be considered unemployed than with the ILO survey

  • Requires claimants to meet regularly with a 'work coach'

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

Unemployment rate

Employment rate

equals fraction numerator no. space actively space seeking over denominator total space labour space force end fraction space straight x space 100

equals fraction numerator no. space in space employment over denominator population space of space working space age end fraction space straight x space 100

Labour force participation rate

Inactivity rate

equals fraction numerator labour space force over denominator total space population end fraction space straight x space 100

equals fraction numerator inactive space people space of space working space age over denominator working space age space population end fraction space straight x 100

  • 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: deindustrialisation

    • 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 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-skill 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

2-1-3-unemployment-

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

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Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.

Jenna Quinn

Author: Jenna Quinn

Expertise: Head of New Subjects

Jenna studied at Cardiff University before training to become a science teacher at the University of Bath specialising in Biology (although she loves teaching all three sciences at GCSE level!). Teaching is her passion, and with 10 years experience teaching across a wide range of specifications – from GCSE and A Level Biology in the UK to IGCSE and IB Biology internationally – she knows what is required to pass those Biology exams.