Revise Unemployment for Cambridge 9708 (4.5)

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, such as Jobseeker's Allowance. 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.

Disequilibrium unemployment occurs when the labour market is not in equilibrium, meaning the number of people willing to work at the going wage rate exceeds the number of jobs available. The main type is demand-deficient (or cyclical) unemployment, which is 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. This type of unemployment is associated with a negative output gap. Another type is real-wage unemployment, which occurs when wages are forced and held above the market-clearing equilibrium level. This can be caused by powerful trade unions negotiating high wage settlements or by a national minimum wage set above the equilibrium, leading to an excess supply of labour.

Equilibrium unemployment, also known as the Natural Rate of Unemployment (NRU), exists even when the aggregate demand for labour equals the aggregate supply. It is not caused by a lack of demand for workers overall. Frictional unemployment is the short-term unemployment experienced by people moving between jobs. Structural unemployment is a more serious, long-term problem caused by a mismatch between the skills of the unemployed and the skills needed for available jobs, often due to technological change, de-industrialisation, or foreign competition. Seasonal unemployment affects industries like tourism and agriculture where demand for labour fluctuates with the time of year. These types are considered 'natural' because a degree of labour market friction and structural change is inevitable in a dynamic economy.

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.

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

Labour force = Employed + Unemployed

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

Demand-deficient (cyclical) unemployment occurs when AD is too low — equilibrium Y falls below Yf, creating a recessionary gap. Firms cut output and lay off workers.

Expansionary fiscal or monetary policy shifts AD right, closing the gap and reducing cyclical unemployment.