Employment and Unemployment

This section explains employment and unemployment covering, measures of unemployment, the distinction between unemployment and under-employment, the significance of changes in the rates of employment, unemployment and inactivity, the causes of unemployment and the effects of unemployment on consumers, firms, workers, the Government and society. 

Introduction to Employment and Unemployment

In economics, employment refers to the number of people in work, while unemployment refers to the number of people actively seeking work but unable to find it. The labour market plays a critical role in determining the economic health of a country. Understanding the different measures of employment and unemployment, as well as the causes and effects of unemployment, is vital for analysing the UK economy.

Measures of Unemployment

There are several methods used to measure unemployment, each offering a different perspective on the state of the labour market. These include the Claimant Count and the International Labour Organisation (ILO) measure.

The Claimant Count

The Claimant Count measures the number of people claiming unemployment benefits (e.g., Jobseeker’s Allowance) as their main source of income. It is a relatively simple measure but has some limitations:

Limitations:

• Not all unemployed individuals are eligible for benefits.
• Some people may claim benefits without actively seeking work.
• Certain groups (e.g., students, the self-employed) are not included in this measure.

The International Labour Organisation (ILO) and the UK Labour Force Survey

The ILO measure of unemployment is based on an internationally standardised definition. It counts people as unemployed if they meet the following criteria:

• They do not have a job.
• They are actively seeking work.
• They are available to start work within two weeks.

This measure is generally considered more comprehensive than the Claimant Count, as it includes individuals who may not be eligible for unemployment benefits but are still actively seeking work. The UK Labour Force Survey (LFS) is the primary source of data for the ILO measure and is conducted quarterly by the Office for National Statistics (ONS).

The Distinction Between Unemployment and Under-Employment

• Unemployment: This refers to people who are willing and able to work but are unable to find employment. Unemployment is typically measured through the ILO definition or the Claimant Count.
• Under-Employment: This refers to individuals who are working part-time or in temporary jobs but wish to work longer hours or in more permanent positions. Underemployment is not always captured by official unemployment statistics, but it can reflect inefficiencies in the labour market.

Example: A highly qualified worker who works part-time at a low-paying job may be technically employed but is under-employed, as they are not fully utilising their skills and potential.

The Significance of Changes in the Rates of Employment, Unemployment and Inactivity

Changes in the rates of employment, unemployment, and inactivity have significant implications for the economy:

Employment Rate

The employment rate is the percentage of the working-age population (usually aged 16-64) that is in work. An increase in employment typically signals a growing economy, higher production, and greater consumer spending. However, it’s important to note that employment may rise even in a slow economy if people are working fewer hours or in lower-quality jobs.

Unemployment Rate

The unemployment rate is the percentage of the labour force that is unemployed and actively seeking work. A high unemployment rate can signal an economic downturn, while a falling unemployment rate can suggest that the economy is improving. However, it’s important to analyse the reasons behind changes in unemployment—whether due to cyclical factors or structural changes in the economy.

Inactivity Rate

The economic inactivity rate refers to the percentage of the working-age population that is not engaged in the labour market (i.e., neither working nor actively seeking work). This can include people who are retired, discouraged workers, or full-time carers. A rising inactivity rate can be a sign of social and economic challenges, such as a lack of job opportunities or increasing numbers of people who have become discouraged and given up looking for work.

The Causes of Unemployment

Unemployment is not a single phenomenon but rather a complex issue influenced by a variety of factors. The main types of unemployment include:

Structural Unemployment

Structural unemployment occurs when there is a mismatch between the skills of the workforce and the requirements of available jobs. This can happen due to:

• Technological changes (e.g., automation or digitalisation replacing certain jobs).
• Changes in the structure of the economy (e.g., the decline of manufacturing industries and growth of the service sector).
• Geographical immobility, where workers cannot move to areas with job vacancies.

Frictional Unemployment

Frictional unemployment is short-term unemployment that occurs when people are transitioning between jobs or entering the workforce for the first time. It is often seen as a natural part of the labour market, as people look for jobs that best suit their skills and preferences.

Seasonal Unemployment

Seasonal unemployment is caused by the regular changes in demand for labour throughout the year. Certain industries, such as agriculture, tourism, and retail, experience fluctuations in demand depending on the time of year, leading to temporary unemployment during off-peak seasons.

Demand Deficiency and Cyclical Unemployment

Cyclical (or demand-deficient) unemployment occurs when there is insufficient demand in the economy for goods and services. During economic downturns or recessions, firms cut back on production, leading to layoffs and increased unemployment. This type of unemployment is typically temporary, as it usually improves when the economy recovers.

Real Wage Inflexibility

Real wage inflexibility occurs when wages do not adjust to the equilibrium level that would clear the labour market. For example, if wages are too high for employers to afford, they may not hire as many workers, leading to involuntary unemployment. This could be due to minimum wage laws, trade union activities, or government interventions that prevent wages from falling to market-clearing levels.

The Significance of Migration and Skills for Employment and Unemployment

Migration

Migration can have both positive and negative effects on employment and unemployment:

• Positive Effects: Migrants can fill labour shortages, especially in sectors that face skill shortages or where domestic workers are unwilling to work (e.g., agriculture, healthcare). In addition, migrants often contribute to the economy through taxes and consumption.
• Negative Effects: If there is a large influx of migrants, this can increase competition for jobs, potentially putting downward pressure on wages and increasing unemployment among native workers, particularly in low-skilled sectors.

Skills

The level and quality of skills in the workforce play a crucial role in employment outcomes:

• A highly skilled workforce is more likely to be employed, as skilled workers are in demand across various industries.
• Low skills can lead to higher unemployment, as workers may struggle to find jobs that match their qualifications. Furthermore, automation and technological advancements may eliminate many low-skilled jobs, exacerbating structural unemployment.

The Effects of Unemployment on Consumers, Firms, Workers, the Government, and Society

Unemployment has wide-ranging effects on individuals, firms, and the economy as a whole.

Consumers

Unemployment leads to reduced incomes for individuals and families, which can lower consumer spending. This decrease in demand can contribute to a cycle of economic stagnation. Long-term unemployment can lead to a decrease in living standards and rising poverty levels.

Firms

For firms, high unemployment can reduce demand for their goods and services, as unemployed individuals have less disposable income. However, firms may benefit from a larger pool of workers willing to accept lower wages. On the other hand, high unemployment can also lead to skills shortages in certain sectors, reducing firms’ productivity.

Workers

Workers who are unemployed suffer from financial insecurity, stress, and potential loss of skills over time (especially long-term unemployment). Unemployment can also negatively affect mental health and social well-being, leading to lower life satisfaction.

The Government

Unemployment puts a strain on government finances, as more money is spent on welfare benefits and unemployment-related support. High unemployment can also lead to lower tax revenues, as fewer people are working and contributing taxes. Governments may face pressure to implement policies to reduce unemployment, such as fiscal stimulus or labour market reforms.

Society

Unemployment can lead to social problems such as increased crime, family breakdown, and political instability. Long-term unemployment can also contribute to social exclusion, where individuals feel disconnected from the workforce and society.

Summary of Key Points

• Unemployment is measured through the Claimant Count and ILO (Labour Force Survey) definitions.
• Underemployment refers to working fewer hours or in lower-quality jobs than one would prefer.
• Changes in employment, unemployment, and inactivity rates signal different aspects of economic health.
• Types of unemployment include structural, frictional, seasonal, demand-deficiency (cyclical), and real wage inflexibility.
• Migration and skills impact the labour market, influencing both employment and unemployment levels.
• Unemployment affects not only individuals but also firms, the government, and society at large, leading to lower consumption, reduced government revenues, and social problems.

By understanding the causes, measurements, and implications of unemployment, you will be better prepared to analyse and discuss employment issues within the UK economy.