2.3.2a Measures and types of unemployment

The UK Measures Unemployment in Two Ways, and Joblessness Comes in Four Main Types

1. Unemployment is measured in two main ways in the UK.
2. The claimant count records those claiming unemployment-related benefits, such as Universal Credit, who are required to look for work.
3. The Labour Force Survey (LFS) measure uses the internationally agreed ILO definition to count everyone who is out of work, actively seeking a job and available to start.

The Two UK Measures Rarely Give the Same Figure

1. The claimant count changes whenever benefit rules change who is eligible to claim.
2. The LFS measure includes people who are seeking work but do not claim benefits, so it is usually higher.
3. Hidden unemployment and discouraged workers can be missed by both measures.

Unemployment Differs From Underemployment and Inactivity

1. The unemployed are out of work but actively seeking and available for work.
2. The underemployed are in work but want more hours or are working below their skill level.
3. The economically inactive are of working age but neither working nor seeking work, so they are not counted as unemployed.

Unemployment Can Be Voluntary or Involuntary

1. Voluntary unemployment occurs when a worker is unwilling to accept a job at the going wage rate, for example while searching for a better offer or because the wage would not exceed their benefits.
2. Involuntary unemployment occurs when a worker is willing and able to work at the going wage rate but cannot find a job.

The Four Types of Unemployment Each Have a Different Cause

1. Frictional unemployment is short-term unemployment as people move between jobs and spend time searching for a suitable new post.
2. Structural unemployment results from a long-term change in the pattern of demand or production, leaving workers' skills or location mismatched with the jobs available, for example after the decline of an industry.
3. Cyclical unemployment, also called demand-deficient unemployment, arises during an economic downturn when a fall in aggregate demand reduces firms' demand for labour.
4. Seasonal unemployment occurs when demand for certain workers falls at particular times of the year, for example in tourism, agriculture or construction.

Full Employment Does Not Mean Zero Unemployment

1. Full employment is when all who are willing and able to work at the going wage rate can find a job.
2. It does not mean zero unemployment, because some frictional, structural and seasonal unemployment always remains.
3. Full employment is a key macroeconomic objective because it raises output and incomes and reduces the waste of idle labour.

2.3.2b Causes and consequences of unemployment

Unemployment Comes in Several Types, Each With a Demand-Side or Supply-Side Cause

1. Frictional unemployment is short-term joblessness while workers move between jobs.
2. Structural unemployment is a lasting mismatch of skills or location.
3. Cyclical unemployment is caused by a fall in aggregate demand during a downturn.
4. Seasonal unemployment follows the time of year, for example in tourism or farming.
5. Real wage unemployment arises when wages are held above the market-clearing level.
6. Cyclical unemployment is a demand-side problem, while frictional, structural, seasonal and real wage unemployment are supply-side.

Employment and Unemployment Are Shaped by Both Demand-Side and Supply-Side Factors

1. The demand for labour is derived from the demand for output.
2. A rise in aggregate demand raises output and hiring, cutting cyclical unemployment.
3. Supply-side unemployment comes from features of the labour market such as skills, mobility and wage-setting.
4. It is not caused by a lack of total demand.

Real Wage Unemployment Occurs When Wages Are Stuck Above the Market-Clearing Level

1. Real wage unemployment is a form of disequilibrium unemployment, arising when the real wage is held above the market-clearing wage.
2. The supply of labour then exceeds the demand for labour, leaving willing workers without jobs.
3. Its main determinants are minimum wages set above the equilibrium wage and strong trade union bargaining that resists wage cuts.

The Natural Rate of Unemployment Is the Equilibrium Rate That Remains When the Labour Market Clears

1. The natural rate of unemployment exists when the labour market is in equilibrium.
2. It is made up of frictional and structural unemployment, the voluntary unemployment that remains when the labour market is in equilibrium.
3. At this rate there is no excess demand for, or excess supply of, labour.
4. Frictional unemployment comes from workers moving between jobs.
5. Structural unemployment comes from skills and location mismatches.
6. The rate is higher when workers are less occupationally or geographically mobile, when skills are poorly matched to vacancies, and when generous benefits weaken the incentive to work.

1. The natural rate sets a floor that demand-side policy cannot easily cross.
2. Pushing unemployment below it tends to raise inflation.
3. So it links unemployment to price stability.

Unemployment Imposes Costs on Individuals, Firms and the Whole Economy

1. Unemployment carries costs for individuals, firms and the economy.
2. For individuals it means lost income, deskilling and poorer health.
3. For the economy it means lost output and higher benefit spending.
4. Individuals lose income and can suffer hysteresis, where a long spell out of work erodes skills.
5. Government loses tax revenue and pays more in benefits.

Longer Spells of Unemployment Cause the Greatest Harm

1. Short spells cause limited harm.
2. Long spells cause deskilling and lasting damage.
3. So the type and length shape the total cost.

How Damaging Is Unemployment? It Depends on the Type and How Long It Lasts

1. Some unemployment is relatively benign, since frictional joblessness is short-lived and can even improve the economy by helping workers find jobs that better match their skills.
2. Cyclical unemployment is often temporary and can be reversed by a recovery in aggregate demand, so in a short downturn its long-run costs may be contained.
3. By contrast, long-term structural unemployment tends to be the most damaging, because hysteresis erodes skills and leaves workers stranded even after demand recovers.
4. The wider cost also depends on scale, as widespread and persistent unemployment means large lost output and higher benefit spending, whereas low, short-term unemployment leaves the economy close to its potential.
5. On balance, unemployment always imposes some cost, but the case for concern is greatest when it is involuntary, cyclical in a deep recession, or structural and long-lasting rather than brief and frictional.