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9708 · 4.5

Unemployment — practice questions

Practice and worked examples for 9708 Unemployment. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

In Country B:

  • Working-age population: 10 million
  • Employed: 5.4 million
  • Unemployed: 0.6 million
  • Economically inactive: 4.0 million

(a) Calculate the labour force and unemployment rate. (b) The economy is in recession with Y = $450bn and Yf = $500bn. Explain the type of unemployment likely to dominate. (c) Suggest one fiscal policy to reduce this unemployment and show on AD–AS.

Show solution outline

(a) Labour force = Employed + Unemployed = 5.4 + 0.6 = 6.0 million

Unemployment rate = (0.6 ÷ 6.0) × 100 = 10%

(b) Type of unemployment Y (450bn)<Yf(450bn) < Yf (500bn) → negative output gap of $50bn → cyclical (demand-deficient) unemployment dominates as firms reduce output.

(c) Fiscal policy Increase G (e.g. infrastructure) or cut taxes → AD shifts right → Y rises toward Yf → firms rehire → cyclical unemployment falls.

On AD–AS: draw AD₁ left of full capacity; AD₂ after expansionary fiscal shift; new equilibrium closer to Yf.

Worked example 2

The government of Econland releases the following labour market data for the year:

  • Labour Force Survey (LFS) measure of unemployed: 1.5 million
  • Claimant Count measure of unemployed: 1.1 million
  • Total Labour Force: 30 million
  • Natural Rate of Unemployment (NRU) is estimated at 4.2%.

(a) Calculate the unemployment rate using both the LFS and Claimant Count measures. (b) Provide two reasons for the difference between the two figures calculated in (a). (c) Using the LFS data, calculate the rate of cyclical unemployment.

Show solution outline

(a) Calculate Unemployment Rates

LFS Unemployment Rate: Rate = (Number unemployed / Labour force) × 100 Rate = (1,500,000 / 30,000,000) × 100 = 5.0%

Claimant Count Unemployment Rate: Rate = (Number claiming benefits / Labour force) × 100 Rate = (1,100,000 / 30,000,000) × 100 = 3.67%

(b) Reasons for the Difference

  1. Eligibility Rules: The Claimant Count only includes those eligible for and claiming unemployment benefits. Some individuals may be unemployed according to the LFS definition (actively seeking work) but not eligible for benefits (e.g., their partner earns too much, or they haven't made enough social security contributions). This makes the Claimant Count lower.
  2. Stigma/Unawareness: Some unemployed individuals who are eligible for benefits may not claim them due to social stigma, lack of information, or the complexity of the application process. They would be excluded from the Claimant Count but included in the LFS if they are seeking work.

(c) Calculate Cyclical Unemployment Rate

Cyclical Unemployment = Total Unemployment Rate - Natural Rate of Unemployment (NRU) Using the more comprehensive LFS measure: Cyclical Unemployment Rate = 5.0% - 4.2% = 0.8%

This indicates that the majority of unemployment in Econland (4.2% out of 5.0%) is structural and frictional, with a smaller component (0.8%) due to a slight deficiency in aggregate demand.

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