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Unemployment

Unemployment: People are willing and able to work but cannot find employment.

Jobless people add nothing to the country’s output, so total output is lower than it could be. Unemployed people also tend to have much lower living standards than people in work. This is why governments aim for low unemployment.

Measuring unemployment: the ILO measure

Many countries measure unemployment with a regular survey of households, using the International Labour Organization (ILO) definition. Because the same definition is used around the world, unemployment can be compared between countries.

The ILO counts a person as unemployed if they are either:

• Has no job, wants one, has looked for work in the past four weeks and could start work within two weeks
• Has no job now, but has found one and will start it within two weeks

Anyone who does at least one hour of paid work a week counts as employed. People out of work who do not meet the ILO definition, e.g. because they are not looking for a job, are economically inactive, not unemployed.

Calculating the unemployment rate

Formula:

Unemployment rate = Number of unemployed ÷ Total labour force × 100

The labour force is everyone who is either employed or unemployed. Give the answer as a percentage, with the % sign, usually to two decimal places.

Types of unemployment

Cyclical unemployment: unemployment caused by falling demand as a result of a downturn in the economic cycle.

Structural unemployment: unemployment caused by changes in the structure of the economy such as the decline in an industry.

Seasonal unemployment: When workers are only required for certain times of the year and unemployed for the rest of the year.

Voluntary unemployment: Unemployment caused by individuals choosing not to work.

Frictional unemployment: when workers are unemployed for a short period of time as they move from one job to another.

More about each type:

• Cyclical: also called demand-deficient unemployment. As the economy slows after a boom and heads into recession, demand for goods and services falls, so firms lay off workers.
• Structural: as an economy develops, some industries shrink, e.g. manufacturing, while others grow, e.g. services. Workers lose jobs when their industry declines or when machines and computers replace them. Some regions suffer more than others, especially those that relied on a declining industry. Their skills may not match the jobs available, and retraining or moving home takes time.
• Seasonal: some jobs only exist at certain times of year, e.g. in hotels and tourist attractions during the holiday season, or on fruit farms at harvest time. Because it depends on the climate, little can be done about it.
• Voluntary: a small number of people choose not to work, e.g. because they are not willing to work for the wages on offer.
• Frictional: people are briefly out of work between jobs, e.g. while waiting to start a new job. It always exists and is not usually seen as a problem.

The impact of unemployment

Eight impacts of unemployment:

• Output: the country is not using its full productive potential, so output, national income and average living standards fall short of what they could be. If unemployment is caused by new technology, though, output may not fall.
• Use of scarce resources: labour is a scarce resource, so people who want to work but cannot are a waste of resources. High youth unemployment is seen as especially wasteful.
• Poverty: state benefits are usually lower than wages, so the unemployed suffer hardship. Some may lose their homes, and long-term unemployment can damage confidence and family life.
• Government spending on benefits: more unemployed people means the government must spend more on unemployment benefits. This has an opportunity cost, as the money cannot be spent on areas such as education or healthcare.
• Tax revenue: most taxes depend on people’s incomes and spending, so tax revenue falls. The government may have to cut public services, borrow more or raise tax rates.
• Consumer confidence: the unemployed have less to spend, and people still in work worry about losing their jobs. They become more cautious and spend less, which can lead to more unemployment.
• Business confidence: falling sales, redundancy payments and worried staff reduce firms’ confidence. They take fewer risks and may delay or scrap investment plans. Firms selling non-essential goods are usually hit hardest.
• Society: when a large local employer closes, whole communities can suffer, local shops struggle and the area becomes run down. Losing a job can also cause stress, poorer health and relationship problems, and in some cases may lead to crime.