Syllabus points
- Define unemployment and explain how the unemployment rate is measured.
- Distinguish the types and causes of unemployment.
- Explain the costs of unemployment.
- Evaluate the difficulties of measuring unemployment.
Measuring unemployment
The unemployment rate is the number of unemployed as a percentage of the labour force:
Unemployment rate = (unemployed ÷ labour force) × 100
The labour force is those working plus those actively seeking work. Two common measures are the claimant count (people claiming unemployment benefits) and a labour-force survey (based on the internationally agreed definition of actively seeking work).
Types of unemployment
| Type | Cause |
|---|---|
| Cyclical (demand-deficient) | A fall in AD during a recession |
| Structural | A permanent change in the pattern of demand or technology; skills mismatch |
| Frictional | People between jobs, searching for a better match |
| Seasonal | Predictable changes in demand across the year |
Cyclical unemployment is usually the largest and most policy-relevant, addressed by demand-side (fiscal/monetary) policy; structural unemployment requires supply-side measures such as retraining.
Costs of unemployment
- Personal: lost income, loss of skills, stress and poorer health.
- Economic: lost output (the economy operates inside its production possibility curve), lower tax revenue and higher benefit spending.
- Social: rising inequality, poverty and, in some cases, social unrest.
Difficulties of measurement
Official figures may understate true joblessness because of discouraged ("hidden unemployed") workers who have stopped searching, and underemployment (part-time workers who want full-time work). They may overstate it if some claimants work in the informal economy. Comparisons across countries are complicated by differing definitions.
Worked example
If 2 million people are unemployed and the labour force is 25 million, the unemployment rate is (2 ÷ 25) × 100 = 8%. A rise in discouraged workers who leave the labour force would *lower* the measured rate even though joblessness has not improved.
Common exam mistakes
- Confusing the labour force (workers + jobseekers) with the total population.
- Treating all unemployment as cyclical — identify the type before recommending a policy.
- Ignoring hidden unemployment and underemployment.
Exam technique
Match the policy to the type of unemployment: demand-side for cyclical, supply-side for structural and frictional. Evaluate measurement limitations when using data.
Quick revision
- Rate = unemployed ÷ labour force × 100.
- Types: cyclical, structural, frictional, seasonal.
- Costs: lost output, lost income, fiscal and social costs.
- Data understates joblessness via discouraged workers and underemployment.