What you'll learn

• How employment and unemployment are measured in the UK.
• The four main types of unemployment: frictional, seasonal, structural and cyclical.
• The consequences of unemployment for workers, firms, government and local communities.
• How governments can reduce unemployment — and why each policy has trade-offs.

3.2.2.3 Employment and unemployment and how they are measured

The labour market

The labour market is where workers offer their labour — human effort and skills used in production — and employers demand labour to produce goods and services.

Governments care about this because one major macroeconomic objective is low unemployment or high employment. However, “low unemployment” does not mean every single person has a job all the time.

A person can be without a job but not counted as unemployed if they are not actively looking for work. For example, someone who has stopped job-searching because they feel discouraged may be classed as economically inactive.

How unemployment is measured

The UK mainly uses two measures.

The Labour Force Survey is a survey of households. It follows the international definition: unemployed people are not working, have been looking for work recently, and are available to start work soon.

The Claimant Count counts people claiming unemployment-related benefits. It can differ from the survey measure because not everyone who is unemployed claims benefits, and benefit rules can change.

The key measure is the unemployment rate:

$$Unemployment\; rate=\frac{number\; unemployed}{labour\; force}\times 100$$

The employment rate is the percentage of working-age people who are in work, often focusing on ages 16 to 64.

Full employment

Full employment means that people who are willing and able to work at the going wage can generally find a job. It does not mean zero unemployment, because some people will always be between jobs or entering the labour market for the first time.

Types, causes and consequences of unemployment

The main types of unemployment have different causes, so they need different policy responses. A policy that helps one type may do very little for another.

Frictional unemployment

Frictional unemployment is short-term unemployment when people are between jobs, entering the labour market, or searching for a better match.

Causes include imperfect information about vacancies, time taken to apply and interview, and people leaving education. A graduate looking for their first job is a typical example.

This is not always a sign of a weak economy. Some frictional unemployment is normal because workers and firms need time to find good matches.

Seasonal unemployment

Seasonal unemployment happens when demand for labour changes predictably at different times of year.

Examples include tourism jobs in seaside towns, agricultural work during harvest periods, and temporary retail jobs around Christmas. The cause is the seasonal pattern of demand for certain goods or services.

Structural unemployment

Structural unemployment occurs when workers’ skills, experience or location no longer match the jobs available.

Causes include new technology, changes in consumer tastes, competition from imports, and long-term decline of particular industries. For example, online shopping has reduced demand for some high-street retail roles while increasing demand for warehouse, delivery and digital skills.

Structural unemployment can be especially damaging because it may last a long time. Workers may need retraining or may need to move location, which can be expensive and difficult.

Cyclical unemployment

Cyclical unemployment, also called demand-deficient unemployment, happens when total spending in the economy falls during a downturn.

If households buy fewer meals out, cafés and restaurants may reduce output and lay off workers. During COVID-19 lockdowns, many firms faced a sudden fall in demand, so the UK government used the furlough scheme to help keep workers attached to their employers.

Consequences of unemployment for different groups

Workers and households

Unemployment usually reduces household income, which can lower living standards. Families may cut spending on non-essential items, fall behind on bills, or rely more on savings and welfare benefits.

There can also be non-financial costs: stress, lower confidence, worse health, and loss of skills if unemployment lasts a long time. Young people may be especially affected because early unemployment can reduce future earnings and experience.

Firms

For firms, unemployment can reduce demand for goods and services because households have less income to spend. This can lower sales for businesses such as Greggs, Tesco, streaming services or local restaurants.

However, firms may also find recruitment easier if more workers are available. Wage pressure may fall, which can reduce costs for some employers. The overall effect depends on the firm and the industry.

Government

Unemployment affects government finances in two directions. Tax revenue falls because fewer people pay income tax and spend money that generates VAT. At the same time, government spending on welfare benefits may rise.

If government spending is greater than tax revenue, the government has a budget deficit. Higher unemployment can make that deficit worse.

The wider economy and society

Unemployment means labour is not being used to produce output. This can reduce Gross Domestic Product, or GDP, which is the value of goods and services produced in an economy.

It can also increase inequality between regions. A town affected by factory closures may face lower incomes, falling house prices and reduced confidence for local firms. There are moral and ethical issues too: unemployment affects dignity, mental health and people’s life chances, so policy is not just about statistics.

Government policies to reduce unemployment

Match the policy to the cause

Governments should choose policies based on the type of unemployment.

For frictional unemployment, policies include better job information, Jobcentre support, careers advice, help with CVs and interviews, and online vacancy matching.

For seasonal unemployment, policies include retraining workers so they can switch sectors during the off-season, or encouraging local economies to diversify beyond one seasonal industry.

For structural unemployment, governments may use education, apprenticeships, adult retraining, transport improvements, regional investment and support for new businesses. These are often called supply-side policies, because they aim to improve the productive ability of workers and firms.

For cyclical unemployment, governments may try to increase spending in the economy. Fiscal policy means government decisions on spending and taxation. Examples include infrastructure projects, temporary tax cuts, or support for firms to keep workers employed. Monetary policy means changes to interest rates by the Bank of England; lower interest rates can encourage borrowing and spending.

In 2022–23, the Bank of England raised interest rates to reduce inflation, which is a rise in the average price level. This shows a policy trade-off: higher interest rates may help control inflation, but they can also reduce spending and make unemployment more likely.