3.7 - Unemployment
Definition and measurement of unemployment
Unemployment occurs when people who are capable of working are unable to find suitable jobs despite actively seeking them.
Key concepts in defining unemployment
An individual counts as unemployed if they are actively searching for work but cannot secure a position. The labour force consists of everyone who is either employed or unemployed. The population of working age, usually those between 15 and 64 years old, includes people outside the labour force.
Formula for unemployment rate
Where:
- Number of unemployed = People actively looking for work but without jobs
- Labour force = Total of employed and unemployed individuals
Difficulties in measuring unemployment
Official unemployment figures provide valuable insights but often fail to capture the full picture due to various limitations.
Reasons official statistics may underestimate unemployment
- Discouraged workers - Individuals who have given up searching for jobs after prolonged failure.
- Underemployed people - Those working fewer hours than desired or in positions that do not utilize their skills.
- Hidden unemployment - A term that covers both discouraged workers and the underemployed.
Reasons official statistics may overestimate unemployment
- Some people hide their actual employment to continue claiming benefits or to evade taxes.
- Individuals involved in illegal work may claim to be unemployed.
Limitations in revealing disparities
Unemployment data often overlook variations across different groups.
Additional measures of unemployment:
- Youth unemployment - Focuses on those aged 15-24.
- Long-term unemployment rate - Measures the percentage of the labour force unemployed for 12 months or more.
Types and causes of unemployment
Unemployment can be categorised into different types, each with specific causes.
Seasonal unemployment
Seasonal unemployment arises from predictable fluctuations in labour demand. Official statistics are often adjusted seasonally to reveal underlying trends.
Frictional unemployment
Frictional unemployment occurs when workers are temporarily between jobs. This type is usually short-term and largely unavoidable. It can be reduced by improving access to job vacancy information.
Cyclical unemployment
Cyclical unemployment is linked to economic downturns, where falling aggregate demand leads to reduced business activity and job losses. During recessions, firms cut staff because wages do not easily decrease (known as downward wage stickiness). Governments can address this through demand-side policies.
Structural unemployment
Structural unemployment persists even in recovering economies due to mismatches between available jobs and workers' skills or locations.
Types of structural unemployment:
- Skills mismatch - Job openings exist, but unemployed individuals lack the necessary qualifications, often due to technological changes.
- Geographic mismatch - Jobs are available in one region, but unemployed workers live elsewhere.
Labour market rigidities:
- Minimum wage laws.
- High non-wage costs.
- Strong trade unions negotiating elevated wages.
- Strict job protection laws.
- Generous unemployment benefits that reduce the incentive to accept available jobs.
The natural rate of unemployment
The natural rate of unemployment (NRU) represents the baseline level of unemployment that exists even in a balanced economy, excluding cyclical factors.
Components of the natural rate of unemployment
The natural rate includes seasonal, frictional, and structural unemployment. It represents the equilibrium point where labour supply and demand balance. Not all individuals in this category choose to be unemployed; many struggle to find suitable roles.
The labour market equilibrium model
In this model, curves illustrate how wages affect employment levels:
- Labour demand curve - Shows the number of workers firms want to hire at various wage rates.
- Labour force curve - Indicates how many people are willing to enter the job market at different wages.
- Accept jobs curve - Represents the number of people who will accept job offers at each wage level.