Revise Employment and unemployment for Cambridge 2281 (4.7)

Unemployment is measured primarily in two ways: the Labour Force Survey (LFS) and the Claimant Count. The LFS is a standardised survey, based on the International Labour Organisation (ILO) definition, which classes someone as unemployed if they are without a job, have actively sought work in the last four weeks, and are available to start in the next two. This provides internationally comparable data but is subject to sampling errors. The Claimant Count, by contrast, is simply a record of the number of people claiming unemployment-related benefits. While cheaper and quicker to compile, its figures can be distorted by changes in benefit eligibility rules and may exclude individuals who are unemployed but not eligible for or not claiming benefits.

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

Labour force = Employed + Unemployed

Participation rate = $\frac{\text{Labour force}}{\text{Working-age population}} \times 100$

Unemployment can be categorised into two main groups: disequilibrium and equilibrium unemployment.

Disequilibrium unemployment occurs when the labour market is not in equilibrium. This includes:

• Demand-deficient (or cyclical) unemployment: Caused by a fall in aggregate demand (AD) during an economic downturn or recession. As firms' sales decline, they cut back on production and lay off workers.
• Real-wage unemployment: Occurs when wages are forced and held above the market-clearing equilibrium level, for example by a minimum wage.

Equilibrium unemployment exists even when the aggregate demand for labour equals the aggregate supply. It is also known as the Natural Rate of Unemployment (NRU). This includes:

• Frictional unemployment: Short-term unemployment experienced by people moving between jobs.
• Structural unemployment: A more serious, long-term problem caused by a mismatch between the skills of the unemployed and the skills needed for available jobs.
• Seasonal unemployment: Affects industries like tourism and agriculture where demand for labour fluctuates with the time of year.

The appropriate policy response depends on the type of unemployment. Demand-deficient unemployment is tackled using demand-side policies. Expansionary fiscal policy (cutting taxes, increasing government spending) or expansionary monetary policy (lowering interest rates) can be used to boost aggregate demand, increase output, and create jobs. In contrast, equilibrium unemployment requires supply-side policies. To reduce structural unemployment, governments can invest in education and training schemes to re-skill workers, or provide subsidies to firms that hire the long-term unemployed. Frictional unemployment can be reduced by improving information flows, for example, through better job centres and online vacancy websites. Reducing the generosity of unemployment benefits may also increase the incentive for the unemployed to find work more quickly.