Employment

What you'll learn

• How economists distinguish employment, unemployment, the labour force, and economic inactivity.
• How the Labour Force Survey and Claimant Count measure unemployment differently.
• Why governments aim for full employment, but not zero unemployment.
• How to evaluate the causes and consequences of unemployment and the effects of full employment.

Employment, unemployment and the labour force

In economics, employment is not just “having a job” in a casual sense. It is part of how we measure how well an economy is using its labour resources.

A key point is that unemployment is about being out of work but still in the labour force. Someone who has stopped looking for work is usually counted as economically inactive, not unemployed.

Measuring unemployment: LFS and Claimant Count

The UK has two main unemployment measures. They often move together, but they are not identical because they count different things.

The Labour Force Survey (LFS) is usually better for comparing unemployment over time and across countries. The Claimant Count is useful for short-term local changes but can rise or fall because benefit rules change, even if true unemployment has not changed much.

Full employment as a policy objective

Full employment is one of the main macroeconomic policy objectives. It matters because labour is a scarce resource: if people who want work cannot find it, the economy produces less than it could.

There will usually be some frictional unemployment, which is short-term unemployment while people move between jobs. There may also be some structural unemployment, where workers’ skills or locations do not match available jobs.

Economists sometimes link full employment to the natural rate of unemployment or the NAIRU, the Non-Accelerating Inflation Rate of Unemployment. This is the unemployment rate consistent with stable inflation.

Causes of unemployment

Cyclical or demand-deficient unemployment

Aggregate demand (AD) means total spending in the economy by households, firms, government, and overseas buyers. If AD falls, firms sell less output. They may reduce production and cut labour demand, causing cyclical unemployment.

This is more likely in a slowdown or recession. For example, higher Bank of England interest rates can reduce consumer spending and investment, weakening demand for labour.

Structural unemployment

Structural unemployment happens when the pattern of labour demand changes, but workers cannot easily move into the new jobs available. This may be due to skills gaps, regional immobility, automation, deindustrialisation, or the green transition.

For example, a worker leaving a declining high-street retail job may not immediately have the digital skills needed for a logistics or software role.

Frictional and seasonal unemployment

Frictional unemployment is usually short term and can be beneficial if it helps workers find better jobs. Seasonal unemployment occurs when demand for labour changes predictably during the year, such as in tourism, agriculture, or Christmas retail.

Real-wage unemployment

Real-wage unemployment can occur if the wage rate is held above the market-clearing level. The real wage is the wage adjusted for inflation. If wages are too high relative to productivity, firms may demand fewer workers than the number willing to work.

Labour demand is linked to marginal revenue product (MRP), the extra revenue a firm gains from employing one more worker. The diagram shows unemployment as excess labour supply when the wage is held above equilibrium.

Consequences of unemployment

Unemployment has costs for individuals, firms, the government, and the wider economy.

For individuals, unemployment reduces income, living standards, confidence, and sometimes mental and physical health. Long-term unemployment can cause hysteresis, where people lose skills, work habits, and employability, making unemployment persist even after demand recovers.

For the government, unemployment lowers tax revenue from income tax, National Insurance, and VAT. It also raises welfare spending, worsening the budget position.

For the economy, unemployment means wasted resources and lower output. If unemployment is concentrated in particular regions, it can increase inequality and create local decline as spending leaves the area.

However, evaluation matters. Short-term frictional unemployment is much less damaging than long-term structural unemployment. Some unemployment may also reduce wage pressure and help control inflation, although this is a painful way to achieve price stability.

Effects of full employment

Full employment has major benefits. More people earning wages means higher household incomes, stronger consumption, lower poverty, and improved living standards. It also improves government finances because tax receipts rise and welfare spending falls.

Full employment can also support confidence. If workers feel secure, they may spend more. If firms see strong demand, they may invest more, creating a positive cycle of growth and jobs.

But there are trade-offs. If the economy is already close to potential output, extra demand may push up wages and prices rather than output. This links to the short-run Phillips curve idea: lower unemployment can be associated with higher inflationary pressure.

Full employment can also hide problems. A country may have low unemployment but high underemployment, where people have jobs but want more hours or are working below their skill level. Low unemployment may also coexist with weak productivity or insecure work.