Causes and Consequences of Unemployment
Unemployment describes people of working age who are without a job but are actively seeking and available for work.
Before you start
Make sure you're comfortable with these topics first:
Method
- Learn the two official measures (claimant count and the LFS/ILO survey measure) and one reason they can give different totals, e.g. the claimant count excludes people who do not qualify for or claim benefits.
- Learn each type of unemployment with its cause: cyclical (a fall in AD), structural (long-run decline of an industry or region, skills mismatch, occupational or geographical immobility), frictional (time taken to search for and move into a new job), seasonal (predictable, time-of-year changes in labour demand).
- Use the AD/AS or a labour market diagram to show how a fall in AD reduces real output and, via derived demand for labour, raises cyclical unemployment.
- Learn the consequences of unemployment for individuals (lost income, deskilling, poorer physical and mental health), for firms (a larger pool of available labour can lower wage costs, but also lost potential spending from customers), and for the government (lower tax revenue, higher benefit spending, an automatic stabiliser effect on the budget).
- Learn the concept of hysteresis: long spells of unemployment can permanently reduce a person's employability, which can raise the natural rate of unemployment even after a recession ends.
- Practise calculating an unemployment rate (the number unemployed divided by the economically active labour force, multiplied by 100) and interpreting changes in claimant count and LFS data.
- For an evaluation question, weigh consequences by the type and duration of unemployment, since short frictional unemployment is far less damaging than long-term structural unemployment, and by the state of the wider economy.
Worked example
In a region, the economically active labour force is 2.5 million, of whom 2.35 million are in work. Calculate the unemployment rate, and state which measure, claimant count or LFS, is more likely to be used to calculate a figure like this.
- Find the number unemployed: 2.5 million - 2.35 million = 0.15 million (150,000).
- Calculate the unemployment rate: number unemployed divided by the economically active labour force, multiplied by 100.
- Calculate: (0.15 / 2.5) x 100 = 6 percent.
- This kind of calculation, based on the total labour force (in work plus actively seeking work) rather than benefit claims, matches the definition used by the Labour Force Survey/ILO measure, which is based on a household survey rather than benefit records.
Practice questions
Try each question, then tap to reveal the answer.
Q1State the two official UK measures of unemployment.Show answer
Answer: The claimant count and the Labour Force Survey (LFS)/ILO measure.
Q2Define cyclical unemployment.Show answer
Answer: Unemployment caused by a fall in aggregate demand during a downturn or recession, sometimes called demand-deficient unemployment.
Q3Define structural unemployment.Show answer
Answer: Long-term unemployment caused by the decline of a particular industry or region, often because workers' skills or location no longer match where jobs are available.
Q4Give one example of frictional unemployment.Show answer
Answer: A worker who has left one job and is still searching for a new one that matches their skills, even though suitable jobs exist.
Q5What is meant by hysteresis in the context of unemployment?Show answer
Answer: The idea that a long spell of unemployment can permanently damage a person's employability, through deskilling or loss of motivation, raising the natural or structural rate of unemployment even after the economy recovers.
Q6Give one consequence of rising unemployment for government finances.Show answer
Answer: Tax revenue falls while spending on unemployment-related benefits rises, worsening the government's budget position.
Q7A labour force of 1.8 million contains 1.71 million people in work. Calculate the unemployment rate.Show answer
Answer: (1.8 - 1.71) / 1.8 x 100 = 5 percent.
Exam-style questions
Written in the style of a A Level Economics exam paper, with a full mark scheme.
Explain two policies a government could use to reduce structural unemployment.
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Assess the consequences of a sustained rise in structural unemployment for a regional economy.
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See real A Level Economics past-paper questions, with official mark schemes →
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