Employment and Unemployment

Unemployment is when people who are willing and able to work, and actively seeking a job, cannot find one.

Three conditions:

1. Of working age (typically 16-65).
2. Want a job.
3. Actively looking.

Excluded: retirees, full-time students, disabled non-workers, parents at home (if not seeking work).

The labour force = all people in (1)+(2)+(3) PLUS those who already have jobs.

Unemployment rate: $\text{Unemployment rate} = \dfrac{\text{Unemployed}}{\text{Labour force}} \times 100$

Worked example. 25m labour force, 1.5m unemployed → rate = 6%.

Full employment ≈ 3-5% unemployment (some frictional/structural unemployment is inevitable).

Cambridge tip. Mark schemes consistently penalise loose usage. Memorise the three conditions for being unemployed.

1. Cyclical / demand-deficient unemployment.

Cause. Low aggregate demand → firms can't sell their output → cut production → lay off workers.

Example. 2008 financial crisis, 2020 COVID lockdowns.

Cure. Demand-side policies — fiscal stimulus, lower interest rates, government spending. Stimulate AD → firms hire again.

2. Structural unemployment.

Cause. Skills mismatch — long-term changes in industry mean workers' skills don't match available jobs.

Example. Decline of UK coal mining (1980s-1990s); decline of US manufacturing as Asia gained comparative advantage.

Cure. Supply-side policies — retraining programmes, education, helping workers move to where jobs are.

3. Frictional unemployment.

Cause. Workers moving between jobs — searching, applying, retraining for a better fit. Always present in any economy.

Example. A graduate looking for their first job; a worker who left one job and is looking for another.

Cure. Mostly inevitable. Improve information (job search platforms, employment agencies) to shorten the search.

4. Seasonal unemployment.

Cause. Demand for the worker's services varies with the season.

Example. Agricultural workers in winter; ski instructors in summer; tourism workers in off-season.

Cure. Counter-seasonal industries; encourage workers to develop multiple skills.

Cambridge tip. Mark schemes for "types of unemployment" expect 4 distinct types with both causes AND cures. Top-band candidates name examples.

To individuals:

• Loss of income, savings drained.
• Loss of skills (skills depreciate without practice).
• Mental health impact (depression, anxiety).
• Loss of social status.
• Family stress.

To government:

• Higher spending on unemployment benefits.
• Lower tax revenue (no income tax from unemployed).
• More healthcare costs (unemployment-related illness).
• Higher crime-related spending.

To economy:

• Lost output (real GDP below potential).
• Lower aggregate demand (unemployed have less to spend).
• Less innovation (skills not used).

Long-term unemployment is particularly damaging. Workers who are unemployed for over a year:

• Lose much of their skills.
• Find re-employment harder.
• May leave the labour force entirely (no longer counted as unemployed).

Cambridge tip. Mark schemes for "costs of unemployment" expect costs at MULTIPLE LEVELS — individual, government, economy. Top-band answers cover all three.