Chapter 19

Unemployment

Unemployment occurs when people who are willing and able to work cannot find a job. This does not mean
that all people who are not working are unemployed, for example, children are too young to work and some
adults are retired.
Also, a number of adults of working age are not seeking jobs, including people who are at university, those
who have retired early, homemakers and those not well enough to work.
People who are not working and trying to find employment are said to be economically inactive. They are
not part of the labour force.

Homemakers:
............................................................................................................................................................................
...........................................................................................................................................................................
Economically inactive:
People who are not working and trying to find employment are said to be economically inactive. They are not
……………………………………………………………………………………………………………………………………………………………………..
part of the labour force.
Economically active:
The unemployed are, in contrast, part of the labour force. They are an economic resource that is not currently
……………………………………………………………………………………………………………………………………………………………………..
being used. Anyone in the labour force is said to be economically active
Labour force:
……………………………………………………………………………………………………………………………………………………………………..

Labour force
The labour force in an economy defined as the total number of workers who are available for work.
It therefore refers to all people who can contribute to the production of goods and services. As well as those
actually in employment, it also includes those who are unemployed and who are seeking employment.
The size of country's labour force depends upon wide range of demographic, economic social and cultural
factors, such as:
the school leaving age
 …………………………………………………………………………………………………………………………………………….
the number of people who remain in full-time education above the school leaving age
 …………………………………………………………………………………………………………………………………………….
 the retirement age
……………………………………………………………………………………………………………………………………………..
the proportion of women who join the labour force.
 ……………………………………………………………………………………………………………………………………………..

A country with higher number of people of working age is likely to have larger labour force than one with a
smaller number of people of working age.

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This, however, is not always the case. This is because the size of the labour force is also influenced by the
labour force participation rate.

There are some reasons why the labour force participation rate may be relatively low in some countries.

 a higher participation rate in higher education

 a relatively large proportion of workers deciding to take early retirement
 the contribution of women in the labour force is constrained by social and cultural factors in some
countries.
Labour force participation rate:
………………………………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………………………………………………..

Level of unemployment and rate of unemployment

Level of unemployment: ………………………………………………………………………………………………………………………….

Unemployment rate:
………………………………………………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………..

Unemployment rate = Number of people unemployed X 100

Number of people in the labour force

Example:
Labour force in Argentina is 50 million workers, 4.3 million of whom are unemployed. Calculate the
unemployment rate.

unemployment rate= 4.3 100

50

= 8.6%

The level and rate of unemployment may move in the same direction. This, however, is not always the case.
If the labour force increases by a greater percentage than the level of unemployment, the unemployment
rate will fall.

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For instance, if the labour force is initially 40 million with 2 million unemployed, the unemployment rate
would be 5%. If the labour force rises to 44 million and the level of unemployment increases to 2.1 million,
the unemployment rate would fall to 4.8%.

Governments also measure the employment rate and the labour force participation rate.
Employment rate: employed workers as a percentage of the population of working age
The employment rate and the unemployment rate do not add up to 100%. This is because the employment
rate is the proportion of the working age population who are in work and not the proportion of the labour
force in work.

The stock and flow of unemployment

A stock is measured at a particular time period whereas a flow is measured over time.
The level of unemployment and the unemployment rate show unemployment at a particular time period.
They are a snapshot of unemployment at a certain point in time. They do not show the exact situation as
people move into and out of unemployment.
The number of people unemployed may stay the same over a period of months. This does not mean that it
is the same people.
Discouraged workers: workers who would like a job but who have given up actively seeking work after a
period of trying to find work.

The main reasons why people may enter and why they may leave the state of unemployment are shown in
Figure below.

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Measures of unemployment
There are two main methods of measuring unemployment:
1. The claimant count measure counts
2. The labour force survey

Claimant count measure:

………………………………………………………………………………………………………………………………………………………………...
Labour force survey measure:
…………………………………………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………………………………………

1. Claimant count measure

The claimant count measure is relatively cheap and quick to calculate as it is based on information that the
government collects as it pays out benefits. However, the figure obtained may not be entirely accurate. It
may overstate or understate the true figure because, it may include some people who are not really
unemployed and may omit some people who are genuinely unemployed.
Some of those receiving unemployment benefits may not be actively seeking employment and some may be
working and claiming benefits illegally.

2. Labour force survey measure

The labour force survey measure is more widely used than the claimant count measure.
The measure involves conducting a survey, by using the International Labour Organisation (ILO) definition
of unemployment. The definition includes as unemployed all people of working age who, in a specified
period, are without work, but who are available for work in the next two weeks and who are seeking paid
employment.
It has the advantage that it is based on internationally agreed concepts and definitions, so makes
international comparisons easier as well as more information is found on.
The data are more expensive and time-consuming to collect than the claimant count measure. Also, as the
data are based on a sample survey, they are subject to sampling error and to the practical problems of data
collection.
Sampling error: the people being surveyed having different characteristics or experiences to the rest of the
population.

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The causes of unemployment
Unemployment can be divided into three main types as, frictional, structural and cyclical.

Types of
unemployment

Frictional unemployment Structural unemployment Cyclical unemployment

Temporary unemployment Unemployment that arises Unemployment that arises

that arises, when workers due to changes in the due to lack of AD.
are between jobs. structure of the economy.

Voluntary unemployment Regional unemployment

Search unemployment Technological unemployment
Casual unemployment International unemployment
Seasonal unemployment

Frictional unemployment
Frictional unemployment is unemployment that arises when workers are between jobs.
Forms of frictional unemployment.

 Voluntary unemployment
This occurs when workers are not willing to accept jobs at the current wage rate and working conditions. If
the amount workers can earn in employment is less than they can receive in benefits, some workers may
decide to stay unemployed.

 Search unemployment
Search unemployment arises when workers do not accept the first job or jobs on offer, but spend some time
looking for a better-paid job. The provision of more and better-quality information may reduce search
unemployment.

 Casual unemployment
Casual unemployment refers to workers who are out of work between periods of employment including, for
example, actors, supply teachers and construction workers.

 Seasonal unemployment
Seasonal unemployment occurs when demand for workers fluctuates according to the time of the year.
During periods of the year, people working in, for example, the tourism, hospitality, building and farming
industries may be out of work.

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Structural unemployment

Structural unemployment arises due to changes in the structure of the economy.

Over time, the pattern of demand and supply changes. Demand for some products decreases while demand
for other products increases. Some industries expand and some industries contract. Methods of production
change, often driven by advances in technology.
During this time, there may be a mismatch between job vacancies and the skills, qualifications, experience
and geographical location of those who have lost their jobs. If workers cannot move from one industry to
another industry, due to a lack of geographical or occupational immobility, they may stay structurally
unemployed for some time.
Structural unemployment can take a number of forms:

 Regional unemployment
Declining industries may be concentrated in a particular area or areas of the country. For instance, a decrease
in demand for gold could result in a decline in the South African gold mining industry and cause workers in
the gold mining areas, including Witwatersrand, to lose their jobs.

 Technological unemployment
People are out of work due to the introduction of labour-saving techniques. For example, the development
of drones and robots delivering shopping is resulting in some delivery drivers losing their jobs.

 International unemployment
This occurs when workers lose their jobs because demand switches from domestic industries to more
competitive foreign industries.
For instance, the number of steel workers in the UK has fallen significantly over the past 40 years as the UK
steel industry has declined. In contrast, during this period, the Chinese steel industry has expanded, creating
more jobs.

Cyclical unemployment
Frictional and structural unemployment arise largely due to problems on the supply side of the economy.
Cyclical unemployment or demand-deficient unemployment, arises due to a lack of aggregate demand.

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Above figure shows the labour market initially in equilibrium at a wage rate of W. Then as a result of a fall in
aggregate demand, firms reduce output and aggregate demand for labour shifts to ADL1. If workers resist
wage cuts, demand-deficient unemployment XQ will exist.
Even if wage rates fall, this type of unemployment may persist. This is because a cut in wages would reduce
demand for goods and services as people would have less money to spend, which would cause firms to
reduce both their output further and make more workers redundant (lose their jobs).

The consequences of unemployment

Unemployment has consequences for the unemployed themselves, firms and the economy as a whole.
Workers

 Workers who lose their jobs are likely to experience a fall in income.
 Unemployed people are likely to find it more difficult to get another job the longer they have been
out of work.
Because they will miss out on training, will become out of touch with advances in technology
and may lose confidence.

 Experience a decline in their physical and mental well-being.

Firms

 Firms wanting to expand may have a greater choice of potential workers.

Frictional unemployment allows the economy to respond quicker to changes in demand and
supply conditions, with workers moving from declining to expanding industries.

 Firms may also benefit from workers not requesting wage rises for fear of losing their jobs.
Economy

 The economy will experience an opportunity cost.

 Output will be below its potential level.
If the unemployed were still working, more goods and services would be produced and living
standards would be higher.
 The tax revenue received by the government will be lower.
 If state benefits are paid by the government, there will be an increase in government spending on
the benefits which could have been put to other purposes.

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