Employment and unemployment | IGCSE Class 10 Economics Notes

This note covers the meanings of employment, unemployment and full employment; how the pattern of employment changes as an economy develops; how unemployment is measured (the claimant count, the labour force survey and the unemployment rate formula); the frictional, structural and cyclical causes of unemployment; the consequences of unemployment for individuals, firms and the economy; and the range of government policies used to reduce unemployment.

What do employment, unemployment and full employment mean?

Employment describes a situation in which a person of working age who wants a job has one, usually in return for a wage or salary.

A person is counted as employed if they do any paid work, including part-time or self-employed work.

The opposite situation is unemployment, where a person of working age is actively looking for work and is available to start work but cannot find a job.

The group used to measure these ideas is the labour force, also called the working population: all the people of working age who are either employed or unemployed.

People who are not seeking work, such as full-time students, retired people and those staying at home by choice, are not part of the labour force.

Definition: Full employment. A situation in an economy where almost everyone who is willing and able to work, at the going wage rate, has a job. Full employment does not mean zero unemployment, since there will always be some frictional unemployment as people move between jobs.

An economic activity is work that contributes to a country's output of goods and services, whether paid or self-employed.

A worker is anyone engaged in such an activity, including people who are temporarily away from work owing to illness or bad weather, and people who are self-employed.

These distinctions matter because the way a country defines who counts as "employed" or "in the labour force" affects the unemployment figures it publishes.

How does the pattern of employment change as an economy develops?

As an economy develops, the share of workers in each sector tends to shift. Early on, most workers are in the primary sector (farming, fishing, mining).

As the economy industrialises, workers move into the secondary sector (manufacturing and construction), and as incomes rise further, more workers move into the tertiary sector of services (banking, retail, transport, education and similar industries), because demand for services grows faster than demand for manufactured goods once basic needs are met.

Sectoral shift from primary towards tertiary employment

This long-run shift, from primary towards secondary and then strongly towards tertiary employment, is a common pattern as developing economies grow. In many developing economies, for example, the share of workers in agriculture has fallen sharply over recent decades while the share working in services has risen.

Growth of the formal sector

A second common pattern is a rise in the share of workers employed in the formal sector: registered businesses and public employers that pay regular wages, deduct tax and provide benefits such as pensions, as opposed to the informal sector of unregistered, often small-scale or casual work with no such protection.

As economies develop, more jobs are usually expected to move from the informal to the formal sector, so that a larger proportion of the workforce gains the job security and benefits that formal employment brings.

This shift does not always happen smoothly. A government may find that output and incomes grow strongly while total employment grows only slowly, a pattern sometimes called "jobless growth", because the jobs created are mostly informal and insecure.

Women in the labour force

A third pattern is a change in the share of women in the labour force.

Social attitudes affect how far women take up paid work: where men already earn a high household income, families often discourage women from taking paid jobs outside the home, and unpaid work done by women in the home or on family farms is often not counted as employment at all.

As social attitudes change and more services (which employ a higher share of women) expand, the share of women in the labour force tends to rise.

Decline of the public sector

A fourth pattern, particularly as a country moves from central planning towards a market economy, is a decline in the share of workers employed directly by the public sector (government departments and state-owned enterprises), as state-owned firms are sold or closed and more employment is created by private firms responding to market demand.

Changes in the level of employment

The total level of employment, the number of people in work, also changes over time. As an economy grows, its working-age population and labour force usually grow too, and the level of employment rises when output grows fast enough to create jobs for new entrants. In a recession the level of employment falls as firms cut output and lay workers off, and it recovers as the economy picks up.

Employment can fall in one sector, such as agriculture, while total employment rises, as workers move into other sectors. And because new technology lets firms produce more with fewer workers, the level of employment can grow more slowly than output.

How is unemployment measured?

Governments use two main methods to measure unemployment.

The claimant count

The claimant count is a count of all the people who are registered as unemployed and are receiving unemployment-related benefit payments from the government.

It is easy and cheap to collect because it uses existing benefit records, but it misses unemployed people who do not qualify for benefit or choose not to claim it, and it changes automatically whenever the rules for claiming benefit change, even if the real number of unemployed people has not changed.

The labour force survey

The labour force survey is a large sample survey of households in which people are asked about their work status: whether they worked in the last week, and if not, whether they were actively looking for work and available to start.

Anyone without a job who was seeking and available for work is counted as unemployed, regardless of whether they claim benefit.

This method is used internationally (following guidelines from the International Labour Organization), which makes it easier to compare unemployment rates between countries, but it is more expensive to run and relies on a sample rather than a full count, so it carries some sampling error.

The unemployment rate formula

Definition: Unemployment rate. The percentage of the labour force that is unemployed. It is calculated using the formula below and is the headline figure used to compare unemployment over time and between countries.

Unemployment rate = unemployed ÷ labour force × 100

Labour force = employed + unemployed

For example, in a country with a labour force of 30 million people, of whom 1.5 million are unemployed, the unemployment rate is (1.5 ÷ 30) × 100 = 5 per cent.

The group that is employed can itself be expressed as a share of the labour force, using a parallel formula.

Employment rate = employed ÷ labour force × 100

Since every member of the labour force is either employed or unemployed, the employment rate and the unemployment rate always add up to 100 per cent.

A related measure is the participation rate, which shows how many people of working age are in the labour force at all.

Participation rate = labour force ÷ working-age population × 100

What are the types and causes of unemployment?

Frictional unemployment

Frictional unemployment is short-term unemployment that occurs while people are between jobs: a worker who has resigned and is searching for a better match, or a school or university leaver looking for a first job.

It exists even when the economy is healthy, because matching workers to vacancies takes time and information is imperfect.

Structural unemployment

Structural unemployment occurs when the pattern of demand for labour changes permanently, so that workers' existing skills, or the location where they live, no longer match the jobs available.

This happens, for example, when an industry declines because of new technology, competition from imports, or a long-term shift in demand, leaving workers whose skills were specific to that industry unable to find similar work nearby.

Structural unemployment can last a long time because retraining or moving takes effort and time.

Cyclical unemployment

Cyclical unemployment, also called demand-deficient unemployment, occurs when total spending (aggregate demand) in the economy falls during a downturn or recession, so that firms need fewer workers across many industries at once.

It rises in a slump and falls again once the economy recovers, which is why it is linked to the business cycle.

Disguised and seasonal unemployment

Two further forms are worth noting from a developing-economy context. Disguised unemployment describes a situation, common on farms, where more workers are engaged on a task than are actually needed, so that each worker's true contribution to output is very low even though they appear to have work.

Seasonal unemployment occurs when work is only available at certain times of the year, for example in agriculture, so that workers are unemployed in the off-season and have to look for other work, often by migrating temporarily to towns.

What are the consequences of unemployment?

Unemployment has costs for the individual, for firms and for the economy as a whole.

Consequences for the individual worker

For the individual, prolonged unemployment is especially damaging because it erodes skills and confidence, making it harder to find work the longer it continues; this is a particular risk with structural unemployment, which tends to last longer than frictional unemployment.

Workers forced out of secure, regular jobs into casual or informal work, a process sometimes called casualisation, often lose benefits such as sick pay and pensions even if their day-to-day earnings do not fall, which reduces the overall quality, not just the quantity, of their employment.

Consequences for the economy and government finances

For the economy, unemployment means that resources, in this case labour, are not being used fully, so actual output falls below potential output.

Government finances also suffer in two ways at once: less income tax and fewer indirect tax receipts come in because fewer people are earning and spending, while government spending on unemployment benefits rises, which together place a strain on the government's budget.

What policies can a government use to reduce unemployment, and how effective are they?

Policies to tackle unemployment are usually grouped by the type of unemployment they are aimed at.

1. Demand-side policies raise total spending in the economy to tackle cyclical unemployment: for example, the government can cut taxes or raise its own spending (expansionary fiscal policy), or the central bank can cut interest rates (expansionary monetary policy), to encourage firms to produce more and take on more workers.
2. Supply-side policies tackle structural unemployment by improving the match between workers' skills and the jobs available, for example through government-funded retraining schemes, support to help workers relocate to find work, and investment in education.
3. Policies to tackle frictional unemployment aim to speed up job matching, for example by improving the information jobseekers have about vacancies through employment exchanges or online job centres, and by making benefit systems simple enough that moving into a new job is not discouraged.
4. Direct job creation schemes, in which the government itself employs workers on public projects such as road building or guaranteed rural work schemes, can reduce unemployment quickly, particularly in regions with few private employers.

Advantages of these policies

Demand-side policies can raise employment relatively quickly across many industries at once, which is valuable in a recession. Supply-side policies address the root cause of structural unemployment rather than just its symptoms, so their effects can last much longer.

Direct job creation gives an immediate income to otherwise unemployed workers and can build useful infrastructure at the same time.

Limitations of these policies

Demand-side policies do little for structural unemployment, since extra spending cannot create jobs for workers whose skills no longer match what employers need.

Supply-side policies such as retraining take years to show results and can be costly for the government to run.

Direct job creation can be expensive, may only provide temporary work, and risks crowding out private sector jobs if it is not carefully targeted. No single policy suits every type of unemployment, which is why governments usually combine measures.

Glossary

• Employment — a situation in which a person of working age who wants work has a paid or self-employed job.
• Unemployment — a situation in which a person of working age is without a job but is actively seeking and available for work.
• Full employment — a situation where almost everyone willing and able to work at the going wage has a job, apart from some unavoidable frictional unemployment.
• Labour force — all people of working age who are either employed or unemployed; also called the working population.
• Participation rate — the percentage of the working-age population that is in the labour force.
• Claimant count — the number of people registered and receiving unemployment benefit, used as one measure of unemployment.
• Labour force survey — a sample survey asking households about their work status, used to measure unemployment internationally.
• Unemployment rate — the number of unemployed people expressed as a percentage of the labour force.
• Frictional unemployment — short-term unemployment while workers move between jobs.
• Structural unemployment — unemployment caused by a permanent change in the pattern of demand for particular skills or locations.
• Cyclical unemployment — unemployment caused by a fall in total spending during a downturn in the business cycle.
• Disguised unemployment — a situation where more workers are engaged on a task than are actually needed, so each contributes very little.
• Seasonal unemployment — unemployment that occurs when work is only available at certain times of the year.
• Formal sector — registered employers that pay regular wages and provide legal benefits and protections to workers.
• Informal sector — unregistered or casual work with no formal protection, benefits or regular contract.

Common errors and misconceptions

• Misconception: full employment means that unemployment is zero. Correct: full employment allows for some frictional unemployment, since people will always be moving between jobs.
• Misconception: the claimant count and the labour force survey always give the same unemployment figure. Correct: they often give different figures because the claimant count misses people who do not claim benefit, while the labour force survey counts anyone seeking and available for work.
• Misconception: anyone without a paid job is unemployed. Correct: only people of working age who are actively seeking work and available to start are counted as unemployed; students, retired people and those not seeking work are outside the labour force.
• Misconception: cyclical and structural unemployment have the same cause. Correct: cyclical unemployment is caused by a temporary fall in total spending, while structural unemployment is caused by a permanent mismatch between workers' skills or location and available jobs.
• Misconception: firms always lose from higher unemployment. Correct: a larger pool of jobseekers can make recruitment easier and may hold down wage costs for firms, even though high unemployment also tends to reduce consumer spending and sales.
• Misconception: unemployment only affects the individual who has lost the job. Correct: unemployment also reduces a country's total output, cuts tax revenue, raises government spending on benefits and can widen income inequality.
• Misconception: raising total spending in the economy will cure all types of unemployment. Correct: demand-side policies mainly help with cyclical unemployment; structural unemployment usually needs retraining or relocation support instead.

Exam-style questions with model answers

Q1. Define 'unemployment rate'. [2 marks]

1. The unemployment rate is the number of unemployed people expressed as a percentage of the labour force (those employed plus those unemployed).

Q2. A country has a labour force of 20 million people, of whom 1.2 million are unemployed. Calculate the unemployment rate. Show your working. [2 marks]

1. Unemployment rate = unemployed ÷ labour force × 100 = (1.2 ÷ 20) × 100 = 6 per cent.

Q3. Identify two reasons why the claimant count may give a different figure from the labour force survey. [2 marks]

1. The claimant count only includes people who qualify for and choose to claim unemployment benefit, so it misses unemployed people who do not claim.
2. The labour force survey counts anyone seeking and available for work regardless of whether they receive benefit, so its total can be higher than the claimant count.

Q4. Explain two causes of frictional unemployment. [4 marks]

1. School and university leavers take time to search for and find a first job that matches their qualifications, during which they are frictionally unemployed.
2. Workers who resign from one job to look for a better one are between jobs for a period while they search and are interviewed, even though suitable vacancies exist.

Q5. Explain two consequences of long-term unemployment for an individual worker. [4 marks]

1. A worker without a job for a long period loses the income they would otherwise have earned, which lowers their household's living standards and can push them towards poverty.
2. The longer a worker is unemployed, the more their existing skills can become outdated or rusty, making it progressively harder for them to find a new job, which can trap them in long-term unemployment.

Q6. Analyse how structural unemployment can arise when a country's traditional manufacturing industry declines sharply because of competition from imports. [6 marks]

1. If a traditional manufacturing industry loses customers to cheaper imported goods, firms in that industry cut production or close, and the workers they employed lose their jobs.
2. These workers typically have skills that are specific to that industry's processes and machinery, which do not transfer easily to other industries that are growing, such as services.
3. Many of these workers may also live in towns built around that one industry, so moving to where new jobs exist means relocating, which is costly and disruptive for families.
4. Because retraining in new skills and relocating both take time and money, these workers can remain unemployed for a long period even while other parts of the economy are creating jobs, which is the defining feature of structural unemployment.

Q7. Analyse two reasons why a rise in the proportion of a country's workforce employed in the tertiary sector might occur as the economy develops. [6 marks]

1. As incomes rise, people spend a growing share of their extra income on services such as healthcare, education, banking and leisure rather than on more manufactured goods, because demand for services rises faster than demand for goods once basic needs are met, so firms in the tertiary sector expand and hire more staff.
2. Advances in technology can raise productivity in agriculture and manufacturing, so fewer workers are needed to produce the same primary and secondary sector output, which releases workers to move into the growing tertiary sector instead.

Q8. Discuss whether or not a government should rely mainly on expansionary fiscal policy to reduce unemployment in its economy. [8 marks]

1. Expansionary fiscal policy, such as higher government spending or tax cuts, raises total spending in the economy, which can quickly encourage firms to produce more and take on more workers, making it well suited to tackling cyclical unemployment that arises from a downturn in spending.
2. It can also be targeted at specific regions or industries through public works projects, creating jobs directly and relatively quickly compared with longer-term measures.
3. However, fiscal policy does little to help workers who are structurally unemployed, since extra demand cannot create jobs for workers whose skills or location no longer match what employers need; these workers need retraining or relocation support instead.
4. Expansionary fiscal policy also risks increasing the government's budget deficit, since it usually means either higher spending or lower tax revenue, which can create problems for government finances if continued for a long time.
5. If the economy is already close to full employment, extra spending is more likely to cause inflation than create many new jobs, so the policy's effectiveness depends heavily on how much spare capacity exists in the economy.
6. Overall, expansionary fiscal policy is a useful tool against cyclical unemployment but is unlikely, on its own, to solve structural or frictional unemployment, so most governments combine it with supply-side and job-matching policies rather than relying on it alone.

Key takeaways

• Employment means having a paid or self-employed job; unemployment means being without a job but actively seeking and available for one; full employment allows for some unavoidable frictional unemployment.
• As economies develop, employment tends to shift from the primary sector towards the secondary sector and then strongly towards the tertiary (service) sector.
• Unemployment is measured through the claimant count (benefit records) and the labour force survey (a sample survey of households), which can give different figures.
• The unemployment rate = unemployed ÷ labour force × 100, where the labour force is the employed plus the unemployed.
• Frictional unemployment is short-term job-search unemployment; structural unemployment arises from a permanent mismatch of skills or location; cyclical unemployment arises from a fall in total spending.
• Unemployment harms individuals through lost income and eroding skills, affects firms through both easier recruitment and lower sales, and harms the economy through lost output and strained government finances.
• Demand-side policies mainly tackle cyclical unemployment, supply-side policies mainly tackle structural unemployment, and no single policy addresses every type at once.

Test yourself

What is the difference between being unemployed and simply not having a job?

Unemployment requires a person of working age to be actively seeking and available for work; someone without a job who is not seeking work, such as a student, is not counted as unemployed.

Why does full employment not mean zero unemployment?

There will always be some frictional unemployment, because workers take time to search for and move into new jobs even when the economy is otherwise healthy.

Give one advantage and one disadvantage of using the claimant count to measure unemployment.

Advantage: it is cheap and easy to collect from existing benefit records. Disadvantage: it misses unemployed people who do not qualify for or claim benefit.

Explain why structural unemployment can last longer than frictional unemployment.

Structural unemployment needs workers to retrain in new skills or relocate to find work, which takes much longer than the short search time typical of frictional unemployment.

How would a fall in total spending in the economy cause cyclical unemployment?

If total spending falls, firms sell less and need fewer workers across many industries, so unemployment rises until spending and demand for labour recover.

Name one supply-side policy a government could use against structural unemployment.

Government-funded retraining schemes that give workers new skills matching the jobs available in growing industries.

Why might high unemployment widen a government's budget deficit?

Unemployment reduces income and other tax revenue because fewer people are earning and spending, while government spending on unemployment benefits rises at the same time.