Revise Employment/unemployment for Cambridge 9708 (9.3)

Unemployment is measured primarily in two ways. The Claimant Count records the number of people actively claiming unemployment-related benefits, such as Jobseeker's Allowance. This method is cheap to collect but can be inaccurate as it excludes individuals who are unemployed but not eligible for or not claiming benefits. The second, more widely accepted measure is the Labour Force Survey (LFS), which aligns with the International Labour Organisation (ILO) definition. It surveys households and defines an individual as unemployed if they are without a job, have been actively seeking work in the past four weeks, and are available to start work within the next two weeks. While more comprehensive and internationally comparable, the LFS is more expensive to compile and subject to sampling errors.

Disequilibrium unemployment occurs when the labour market is not in equilibrium. The most significant type is cyclical unemployment (or demand-deficient unemployment), which is caused by a lack of aggregate demand (AD) in the economy. During a recession, firms reduce output and therefore require fewer workers, leading to redundancies. This is shown on an AD/AS diagram by a leftward shift of the AD curve, resulting in a negative output gap and higher unemployment. Another type is real wage unemployment, which occurs when real wages are held artificially above the market-clearing equilibrium level. This can be caused by powerful trade unions negotiating high wage rates or the imposition of a national minimum wage above the equilibrium, creating an excess supply of labour.

Equilibrium unemployment, also known as the natural rate of unemployment, exists even when the labour market is in equilibrium and the economy is at its potential output. It consists of three main types. Frictional unemployment is short-term and occurs when workers are in the process of moving between jobs. Structural unemployment is longer-term and arises from a mismatch between the skills of the unemployed and the skills required by available jobs, often due to technological change, deindustrialisation, or international competition. For example, the decline of the coal mining industry left many miners structurally unemployed. Seasonal unemployment affects industries like tourism and agriculture, where demand for labour fluctuates with the seasons. These types are considered 'supply-side' problems.

The Natural Rate of Unemployment (NRU) is the rate of unemployment that persists when the economy is at its potential output level, meaning cyclical unemployment is zero. It is comprised of frictional and structural unemployment. The concept is closely related to the Non-Accelerating Inflation Rate of Unemployment (NAIRU). NAIRU is the specific level of unemployment below which inflation will begin to accelerate. If policymakers use demand-side policies to push unemployment below the NAIRU, the increasingly tight labour market will cause firms to bid up wages to attract workers. These higher costs are passed on to consumers as higher prices, leading to a wage-price spiral and accelerating inflation. Therefore, the NAIRU represents the lowest unemployment rate an economy can sustain without triggering rising inflation.

The AD/AS model is essential for analysing unemployment. A fall in aggregate demand, shown by a leftward shift of the AD curve (from AD1 to AD2), leads to a fall in the price level and a contraction in real GDP. As firms produce less output, their demand for labour falls, causing cyclical unemployment. This creates a negative output gap. Conversely, an increase in AD can reduce cyclical unemployment. To reduce the natural rate of unemployment, supply-side policies are needed. These policies, such as investment in education or labour market deregulation, aim to shift the Long-Run Aggregate Supply (LRAS) curve to the right. This signifies an increase in the economy's potential output, which lowers the NRU without creating inflationary pressure.