Often you will be told that anybody without a job is unemployed, in economics this simply is not true. We define the unemployment figure as the number of people of a working age who are able and available to work at the current wage rate and do not have a job. This excludes groups such as students, prisoners, those who are ill or parents who stay at home to look after children.
Higher levels of employment will usually lead to an increase in national income. Unemployed workers mean that an economy is not producing at its maximum potential.
On the production possibility frontier chart below, point X highlights a position where there is unemployment, whilst at Y there is no unemployment (full employment).
There are two main measures of unemployment: the claimant count and Labour Force Survey measure.
the claimant count
This is the simplest measure of measuring the level of unemployment as it uses data the government already has, in the case below unemployment is 10%
The greatest flaw of the claimant count measure is that whenever the government changes the rules about who is eligible for the unemployment benefits the rate of unemployment will change. In the past 25 year there have been 30 changes to who is able to claim unemployment benefits; all but one of these changes made it harder to claim benefits, thereby reducing the claimant count unemployment figures. Of course, the reality was that the number unemployed didn’t change at all.
Labour Force Survey
This measure is based upon a survey that is carried out every three months and based upon a sample of 60,000 UK homes. It uses the International Labour Organisation’s (ILO) definition of unemployment which helps in the comparison of different countries. The ILO’s definition of an unemployed person is somebody who doesn’t have a job and is willing to work within the next two weeks and has been looking for work with the last four weeks, or is out of work, but has found a job and going to start in the next two weeks. People are classed as either employed, unemployed or economically inactive.
The above pie chart shows the distribution of the UK population for January 2008.
Further information about how unemployment figures are calculated can be found here:
Costs of Unemployment
It is possible to divide the costs of unemployment into three areas: economic costs, costs to the government and social costs.
Economic costs are:
- Waste of resources as labour is unutilised.
- Opportunity cost of unemployed workers.
- Workers’ skill level will fall.
Costs to the government are:
- Reduced tax receipts.
- Increased transfer payments for job seekers allowance.
- Increased retraining costs
Social costs are:
- Increased income inequality.
- Could lead to higher crime and social unrest.
- Can increase divorce rates and lower life expectancy.
Types of Unemployment
Cyclical unemployment occurs due to a downturn in economic growth. A fall in consumer demand will lead to firms laying off workers as they are no longer required. As cyclical unemployment increases consumer demand will fall further and more workers will lose their job. This downward spiral will continue until the economy starts to recover.
In the UK, the Monetary Policy Committee’s (MPC) main objective is to maintain price stability. The MPC would have to do to lower interest rates to assist the government’s objective of “creating economic and employment opportunities for all” if cyclical unemployment existed in the economy. Lowering interest rates would impact the economy by stimulating consumption, investment and exports and therefore reduce the level of cyclical unemployment.
The government could use expansionary fiscal policies to try and reduce the level of cyclical unemployment, for example, lowering taxation or increasing government spending. This policy would shift AD to the right and lead to an increase in national income, and therefore a decrease in unemployment as shown on the diagram below.
The downside of this policy is that it causes inflation.
It is also possible to reduce cyclical unemployment by devaluing the currency as this will make imports more expensive and exports cheaper.
Cyclical unemployment more likely to occur when there is a negative output gap.
Frictional unemployment occurs when an individual is between jobs. When somebody leaves their job, either voluntarily or they maybe made redundant or sacked, there will be a period of time while s/he searches for a new job – when you are in this situation you are described as being frictionally unemployed.
As the length of time somebody remains frictionally unemployed increases their expectations of wages and job quality will reduce.
Reducing Job Seeker’s Allowance (unemployment benefit) would encourage those who are frictionally unemployed to reduce the period of time they remain out of work, thereby reducing the number of people frictionally unemployed.
Lowering income tax would also reduce the level of frictional unemployment as there would be a greater incentive to return to work.
The number of vacancies in the economy will affect the length of time people spend frictionally unemployed. It will reduce the amount of time people spend frictionally unemployed as increased vacancies will make it easier for people to find work. There is the possibility that people will spend longer unemployed as they will believe that there is a better chance of them a better job.
Structural unemployment exists due to a skills mismatch, in other words, the skills held by the unemployed are no longer required in the jobs market. There are a number of reasons why structural unemployment may occur:
- Automisation may occur, this is where goods and services are produced by machines rather than by hand.
- Production shifted to overseas.
- Downturn in demand for the good or service.
Education and training can be done to try and reduce the mismatch between the skills the employees have and the skills the employees need.
Seasonal unemployment occurs when demand for labour changes at different times of the year.
Some areas suffer from seasonal unemployment more than others.
The above seasonally adjusted claimant count data has been calculated to remove the effects of seasonal unemployment. It also removes the effects of the changes to the claimant system. The largest change the seasonally adjusted figures had to overcome (and therefore the biggest gap between the two measures) occurred following the rule change in 1988 which led to most 16-18 year olds becoming ineligible to claim unemployment benefits.
Demand and Supply Side Causes of Unemployment
It is possible to distinguish between demand and supply side causes of unemployment:
- Demand Side – cyclical unemployment is a consequence of demand-side factors; decline in any of the components of aggregate demand will cause it.
- Supply Side – frictional, structural and seasonal are all examples of supply side unemployment as they are caused by problems with the supply side of the economy.