A-Level Economics Notes on Unemployment

Definitions

1. Unemployment: The state of being without a paid job while willing and able to work[4].
2. Labor Force: The total number of people who are employed or actively seeking employment.
3. Unemployment Rate: The percentage of the labor force that is unemployed and actively seeking work[4].
4. Structural Unemployment: Unemployment caused by changes in the economy that make certain skills obsolete[6].
5. Cyclical Unemployment: Unemployment that occurs due to downturns in the business cycle.
6. Frictional Unemployment: Short-term unemployment that occurs when people are between jobs or are new entrants to the labor market.
7. Natural Rate of Unemployment: The rate of unemployment that occurs when the economy is at full employment, often estimated to be between 4-5%[5].
8. Underemployment: The condition where individuals are employed but not at their full capacity, either in terms of hours or skill level.
9. Long-term Unemployment: Unemployment lasting for an extended period, usually defined as longer than 27 weeks.
10. Economic Indicator: A statistic that provides valuable information about the economy, such as the unemployment rate[2].

Diagrams

Figure 1: Labour market diagram showing lower employment

Figure 2: AS-AD Diagram showing lower employment

Types of Unemployment

Unemployment: Occurs when an individual is not employed and is actively seeking work but can’t find any. It’s a key indicator of economic health[1].

1. Frictional Unemployment:
   • Definition: Occurs when people are between jobs or are new entrants to the job market.
   • Real-world Example: A college graduate looking for their first job.
   • Details: This is usually short-term and a natural part of job searching[4].
2. Structural Unemployment:
   • Definition: Happens when there’s a mismatch between the skills workers have and the skills needed for available jobs.
   • Real-world Example: Workers in the manufacturing sector losing jobs due to automation.
   • Details: This type of unemployment can last longer and may require retraining[2].
3. Cyclical Unemployment:
   • Definition: Related to the ups and downs of the economy.
   • Real-world Example: Job losses during the 2007–09 global recession.
   • Details: This type is tied to economic downturns and usually improves as the economy recovers[5].
4. Seasonal Unemployment:
   • Definition: Occurs due to seasonal work patterns.
   • Real-world Example: A lifeguard who is unemployed during winter.
   • Details: This is predictable and usually doesn’t last long[6].
5. Long-term Unemployment:
   • Definition: When people are unemployed for an extended period.
   • Real-world Example: Someone who has been jobless for over a year.
   • Details: This can be due to various factors, including economic conditions and personal circumstances[6].
6. Real Unemployment:
   • Definition: Includes those who have given up on finding work.
   • Real-world Example: A person who has stopped job hunting after multiple failed attempts.
   • Details: This type is often not included in official statistics but is a concern for policymakers[6].

Measuring Unemployment

1. Labor Force Surveys: These are questionnaires given to households to collect data on who is employed, unemployed, and actively seeking work. This is a common method for gathering unemployment statistics[3].
2. Unemployment Rate: This is the percentage of the labor force that is unemployed. It’s a key economic indicator that reflects the health of an economy[2].
3. Gross Domestic Product (GDP): Fluctuations in GDP can affect unemployment levels. A decrease in GDP usually leads to higher unemployment[4].

Economic Impact

1. Resource Utilization

• Explanation: Unemployment means that a portion of the labor force is not being used. This is a waste of valuable human resources.
• Real-world Example: In a factory, if 20% of the workforce is unemployed, that’s 20% less productivity.
• Impact: Reduced productivity and economic growth[1].

2. Economic Growth

• Explanation: High unemployment rates can lead to lower economic growth or even economic contraction.
• Real-world Example: The 2008 recession led to high unemployment and slowed economic growth globally[2].

3. Efficiencies in Economies

• Explanation: Unemployment can indicate inefficiencies in an economy, where resources are not allocated optimally.
• Impact: This can lead to a slower rate of economic development[6].

4. Social Issues

• Explanation: Unemployment can lead to social problems like increased crime rates, mental health issues, and poverty.
• Real-world Example: Areas with high unemployment often have higher rates of crime and social unrest.

Causes of Unemployment

1. Education:
   • Explanation: Lack of education or skills can make it difficult for individuals to find jobs.
   • Real-world Example: High school dropouts often face higher unemployment rates.
2. Economic Recession:
   • Explanation: Economic downturns often lead to job losses.
   • Real-world Example: The 2008 financial crisis led to widespread unemployment.
3. Automation/Technological Change:
   • Explanation: Advances in technology can replace human jobs.
   • Real-world Example: Self-checkout machines in supermarkets have reduced the need for cashiers[3].
4. Outsourcing:
   • Explanation: Companies may move jobs to countries where labor is cheaper.
   • Real-world Example: Many U.S. manufacturing jobs have been outsourced to China.
5. Other Explanations:
   • Seasonal Unemployment: Some jobs, like lifeguarding, are only available during certain seasons.
   • Structural Unemployment: Changes in the economy can make certain skills obsolete.
   • Underemployment: People may have jobs but not be working to their full capacity.