AQA A-Level Economics · Revision notes

4.2.3.2 Employment and Unemployment

Unemployment is the measure of labour market performance that matters most directly to people's lives. This topic covers how it is measured, the different types and causes of unemployment, the natural rate of unemployment and what unemployment costs, along with the wider picture of employment and economic inactivity.

Measures of unemployment

The claimant count is the number of people claiming unemployment-related benefits, now mainly Universal Credit claimants who are required to look for work.

• It is cheap and quick to produce, because it comes from administrative records.
• It misses people who are unemployed but not eligible for benefits, or who choose not to claim.
• It changes when benefit rules change, even if the labour market has not.

The International Labour Organisation (ILO) measure uses the UK Labour Force Survey, a regular survey of households. Someone is counted as unemployed if they are:

• without a job,
• have actively looked for work in the past four weeks, and
• are available to start work in the next two weeks.

Key distinction: The ILO measure is internationally comparable and captures people the claimant count misses, so it is usually the higher figure. It includes people who are looking for work but do not claim benefits, for example because they have savings or a partner in work, because they are not eligible, or because they choose not to claim.

Because it is a survey, it is subject to sampling error, and response rates to the survey have fallen in recent years.

Unemployment and under-employment

Under-employment describes people who have work but want more, or whose work does not use their skills.

• Part-time workers who want full-time hours.
• Graduates in jobs that do not require a degree.

Watch out: Under-employed people count as employed, so a low unemployment rate can coexist with significant slack in the labour market.

Employment, unemployment and inactivity

The working-age population divides into three groups:

• Employed: in work, including part-time.
• Unemployed: not in work but actively seeking and available.
• Economically inactive: not in work and not seeking work. This includes full-time students, early retirees, people who are long-term sick and people caring for family.

The economically active population, or labour force, is the employed plus the unemployed.

Unemployment rate = number unemployed / economically active population × 100

The significance of each rate:

• A rising employment rate usually signals a strengthening economy.
• A falling unemployment rate can hide a problem if people are leaving the labour force altogether rather than finding work.
• A rising inactivity rate, for example from long-term sickness, shrinks the labour force and reduces the economy's productive potential.

Voluntary and involuntary unemployment

Voluntary unemployment occurs when people choose not to accept jobs at the going wage rate, for example because take-home pay would be little higher than benefits, or because they are searching for a better-matched job. Involuntary unemployment occurs when people are willing to work at the going wage rate but cannot find a job, for example because aggregate demand is too low.

Causes of unemployment

Structural unemployment arises from a mismatch between the skills or location of workers and the jobs available. When industries decline, as UK coal mining and steel did, workers' skills may not transfer to growing sectors. It can be long-lasting and concentrated in particular regions.

Frictional unemployment is the short-term unemployment of people moving between jobs. Some is unavoidable, and some is useful, since it allows workers to find better-matched jobs.

Seasonal unemployment occurs when demand for labour varies with the time of year, as in tourism, agriculture and retail.

Demand-deficient or cyclical unemployment arises when aggregate demand falls, as in a recession. Firms produce less, so they need fewer workers. It rises and falls with the economic cycle.

Real wage inflexibility (classical unemployment) occurs when real wages are held above the market-clearing level, for example by a minimum wage or trade union bargaining. At that wage, more people want to work than firms want to employ, so there is excess supply of labour.

The natural rate of unemployment

The natural rate of unemployment is the rate of unemployment when the labour market is in equilibrium. It includes frictional and structural unemployment but not cyclical unemployment, so it is never zero. Cyclical unemployment is linked to a negative output gap and can be reduced by raising aggregate demand. The natural rate is determined by supply-side factors, such as the mobility of labour, the skills of the workforce, the gap between benefits and wages after tax, and labour market flexibility. These supply-side causes of unemployment affect the position of the long-run aggregate supply (LRAS) curve.

Migration and skills

• Migration can fill skill shortages and increase the labour force, raising productive potential. Whether migration displaces domestic workers depends on whether migrants complement or substitute for them, and the evidence for the UK suggests the overall effect on unemployment is small.
• Skills determine how easily workers move between jobs and industries. A more skilled, adaptable workforce reduces structural unemployment and makes the economy more resilient to change.

Effects of unemployment

Consumers: lower incomes reduce spending, and the fear of unemployment makes even those in work more cautious.

Firms: lower demand reduces sales and profits. On the other hand, a larger pool of available workers makes recruitment easier and reduces wage pressure.

Workers: loss of income, and long spells of unemployment erode skills and confidence. The longer someone is out of work, the harder it becomes to find work, a process known as hysteresis.

Government: spending on benefits rises while tax revenue from income and spending falls, worsening the budget balance.

Society: unemployment is associated with poorer mental and physical health, and with higher crime and social exclusion in areas where it is concentrated. Output that could have been produced is lost permanently.

Key terms

Common mistakes

• Dividing by the whole population. The unemployment rate divides by the economically active, not by everyone of working age.
• Treating the inactive as unemployed. People not seeking work are inactive, not unemployed.
• Assuming the two measures should match. The ILO measure is usually higher, for reasons that can be explained.
• Treating all unemployment as cyclical. The cause determines the policy: demand-side policy does little for structural unemployment.
• Assuming a falling unemployment rate always means more jobs. It can also mean people leaving the labour force.

How this has been examined

In the AQA papers indexed on this site, this topic has appeared in seven formats:

• 25-mark "Discuss" essay — asked once (2024)
• 25-mark "Assess" essay — asked once (2018)
• 15-mark "Explain" essay — asked 4 times across 4 series (2017 to 2024)
• 9-mark "Explain" data response — asked once (2023)
• 4-mark "Explain" data response — asked once (2020)
• 2-mark calculation — asked twice across 2 series (2020 to 2022)
• 1-mark multiple choice — asked 5 times across 5 series (2017 to 2025)

Where this goes next

The other measures of macroeconomic performance are covered in 4.2.3.1 Economic growth and the economic cycle and 4.2.3.3 Inflation and deflation. Real wage unemployment links to 4.1.6.6 The National Minimum Wage, cyclical unemployment to the output gaps in 4.2.3.1 Economic growth and the economic cycle, and policies to reduce structural unemployment and the natural rate appear in 4.2.5.2 Supply-side policies. The trade-off between unemployment and inflation is examined in 4.2.3.4 Possible conflicts between macroeconomic policy objectives.