Unemployment INTO

MANCHESTER
Week 19 ECONOMICS

L2 to 4
Unemployment
Unemployment
Unemployment refers to the proportion of working age
people, who are able and willing to work, are actively
looking for a job, but currently do not have a job.

It is worth being clear that the unemployed are

identified within the group called “economically active”,
or the “labour force”.
Who are the economically inactive ?

Economically inactive
Who are the economically active? (The Employed And Unemployed)

Economically inactive
The Labour Force
• The labour force (also known as the economically active population) is the number
of people of working age who are either in work, or unemployed but actively
seeking work. It includes both full-time and part-time workers, and employees and
the self-employed.

The unemployment rate:

The unemployment rate is calculated as a percentage:

Unemployment rate = Unemployed workers x 100

Total labour force
Recent pattern of unemployment in UK
In Nov 2020 there were 1.724 million
unemployed people in the UK.
The unemployment rate was 4.9%.
Unemployment is normally expressed in
absolute figures or expressed as a
percentage of the labour force – the
unemployment rate.

This tells us there were 35.18 people in the UK “Labour Force”.

https://www.ons.gov.uk/employmentandlabou
rmarket/peoplenotinwork/unemployment/tim
eseries/mgsx/lms
How is unemployment measured?

The Office for National Statistics (ONS) publishes two

unemployment rate measures (I have added one more):
1) The Claimant Count
2) The Labour Force Survey
3) n
How unemployment is measured
The Claimant Count
The claimant count is a very narrow measure of unemployment as
it includes the number of people who are registered as
unemployed and claiming benefit in the form of Jobseeker’s
Allowance.

To receive JSA, a person must:

§ Be over 18 years old and not in full-time education
§ Be available to work and actively seeking work
§ Have less than £16 000 in household savings
§ Not be working more than 16 hours per week, or have a partner who is
working more than 24 hour
How unemployment is measured
The Labour Force Survey

The LFS is a monthly survey comprising a questionnaire put to a

representative cross section of the population (approximately 120,000
people aged 16 or over in about 61,000 households).

Surveys, such as the LFS, provide estimates of population characteristics rather

than exact measures.

In principle, many random samples could be drawn and each would give different
results, due to the fact that each sample would be made up of different people, who
would give different answers to the questions asked. However, surveys should be
undertaken by highly qualified and experienced individuals and organisations.
Comparing LFS and the Claimant Count
LFS total is considered to be more accurate measure than
the claimant count because:
• A lot of people looking for work may not be able to claim benefit, e.g.
Ø Young unemployed/ graduates
Ø Female/male unemployed workers, i.e. married women/men who can't claim if
their husband/wife earns over a certain amount
Ø Older workers already claiming a pension
• The claimant count can be affected by changes in the rules for claiming benefits. E.g.
The claimant must wait some weeks until the claim is assessed and then paid.

• The claimant count may include some people who are working in the ‘black economy’
but illegally claiming benefits
https://ilostat.ilo.org/
 Recent pattern of UK unemployment rate
Unemployment
Rate (%)

For the pattern of the UK unemployment rate between 2000 to-date access
https://tradingeconomics.com/united-kingdom/unemployment-rate
Poll Answer Key: A = Employed
B = Unemployed
C = Not in Labour Force
Poll Answer Key: A = Employed
B = Unemployed
C = Not in Labour Force
Poll Answer Key: A = Employed
B = Unemployed
C = Not in Labour Force
Types of Unemployment and Their Causes

Supply-side Demand-side
Weakness in supply due Not enough demand for full
to a number of facts employment level to be
concerning the efficiency reached
of the labour market,
government regulation an AD = C + I +G+X-M
law, benefit payment
levels, and taxation
Other aspects concern the
extent of competition
within the economy.
Supply-side
unemployment Demand-side
unemployment

Business cycle
Cyclical
Seasonal?
Supply Side Unemployment
 Frictional unemployment

How to reduce frictional unemployment

•Reduce unemployment benefits. Lower benefits will encourage people to take
a job quicker. (Politically sensitive).
•Better matching of labour with vacant positions. Internet job matching websites
have the potential to find quicker job vacancies for the unemployed.
 Real wage unemployment
• This occurs when the level of wages in a particular industry is above the market
equilibrium rate, resulting in some workers not being able to find jobs. In the past,
trade unions were perceived as being able to maintain high wages at the expense of
fewer jobs.

• More recently, some economists argue that minimum wage legislation can destroy
jobs for low skilled workers.

• It is also argued by some that if unemployed people can obtain substantial benefits,
they may be reluctant to take low paid jobs.
 The Labour Market: Wage level above equilibrium

Price In this scenario, let’s say the car industry

= Wage S labour market, the old equilibrium wage
level and quantity of labour was at
W1Q1.
W1
Ws Demand for labour falls. (D1 to D2).
W2 The new equilibrium position should
be at W2Q2.

D1
D2

Q2 Q1 Quantity
of Labour

Instead, however, the wage level is sticky and, at Ws, creates excess supply of labour
at this wage level. This creates unemployment.

This is where supply side policies may be enacted to make the labour market
more flexible – a free-market – to allow wages to fall as suggested to W2.
B13 here at end L2
The Labour Market: Minimum Wage

Price In this scenario, let’s say the bar worker

= Wage S labour market, the equilibrium wage
level and quantity of labour is at
W1Q1.
Wm
A minimum wage is established at
W1 Wm.

D1
D2

Q1 Quantity
of Labour

This also creates a situation where there is excess supply in this industry. If that
supply is not distributed elsewhere, there is unemployment.
Voluntary unemployment
Voluntary unemployment is likely to occur when the equilibrium
wage rate is below the wage necessary to encourage
individuals to supply their labour.

Reasons for voluntary unemployment

• Generous unemployment benefits, which make accepting a job less
attractive.
• High marginal tax rates, which reduce effective take home pay.
• Unemployed hoping to find a job more suited to
skills/qualifications.
• Some jobs are seen as ‘demeaning’ or too tedious. For example,
fruit picking/security guard.
• Preference for ‘leisure’ (not working) over working.
The Labour Market: Voluntary Unemployment
Price There are two labour supply curves.
= Wage SJA SLF is the labour force in this bar industry.

SJA represents those who accept jobs

in this industry.
SLF
W1
As the wage level rises, SJA approaches
SLF. But, at W1, Q1 to Q2 people choose
to remain unemployed.

D
Q1 Q2 Quantity
Voluntary unemployment of Labour
Q1 to Q2

This is not to be confused with structural unemployment

 Seasonal unemployment
• Some regions (e.g. coastal towns) and some industries
(e.g. agriculture, tourism and construction) need more
workers at some times of the year (especially summer)
than at other times. Winter generally sees a rise in
seasonal unemployment.

Solutions to seasonal unemployment

•Try to diversify the economy. This could be hard to do in tourist
areas.
•Regulations which involve paying workers throughout the year,
even if work is temporary.
•Government creating jobs in the off-season to improve
infrastructure
The Labour Market: Wage level above equilibrium

Price In this scenario, a coastal town employs

= Wage S bar workers at Q1 with a wage of W1
during the summer months.

W1 Outside of the summer months,

demand for labour falls (D1 to D2). The
new equilibrium position is at W2Q2.
W2

D1
D2
Q2 Q1 Quantity
of Labour

However, due to a lack of geographical and occupational mobility, labour in this

industry becomes unemployed in this town and area (Q2 to Q1).
Structural unemployment
Structural unemployment occurs when certain industries decline because
of long term changes in market conditions.

For example, over the last 20 years UK motor vehicle production has
declined while car production in the Far East has increased, creating
structurally unemployed car workers.

Globalisation is an increasingly significant cause of structural

unemployment in many countries.

Structural unemployment may be alleviated through training and education,

assistance with relocation, subsidies,
Demand Side Unemployment
Demand-deficient or involuntary unemployment
Demand-deficient (cyclical) or involuntary
unemployment
LRAS
Price Level

Multiplier effect!

AD1
AD2
AD3

Real GDP
Negative output gap developing

In a recession phase of the business cycle, there is a negative output gap as the
economy is producing below its potential output. If AD is falling (shifts to the left), this
leads to a fall in RNO. Unemployment usually rises as workers get laid off due to weak
demand.
 Demand-deficient (cyclical) or involuntary unemployment
Classical economic theory suggests any cyclical unemployment will be temporary. Classical
economists argue that if there is a fall in demand for labour, wages will fall to overcome the
surplus of workers.

However, Keynes argued that demand deficient unemployment could persist in the long term.

•Workers may resist nominal wage cuts. Wages are ‘sticky downwards’.

•If firms did manage to cut wages, this would lead to a further fall in consumer spending and
aggregate demand, causing more unemployment

•Negative multiplier effect. A rise in unemployment will cause a fall in consumer spending and
therefore further cause a rise in unemployment.

•Furthermore, a rise in unemployment can adversely affect consumer confidence and

consumer spending. The fear of unemployment can cause a rise in savings which further
reduce economic growth. Keynes referred to this as a paradox of thrift.
From IL1 Week 19
Labour
Type of supply or
unemployment Definition demand Possible policies
Structural When the structure of Labour supply Apprenticeships; improved human
unemployment the economy changes = lack of capital from education spending
but labour is workers for
occupationally and available jobs
geographically
immobile

Cyclical When there is a fall in Labour Policies to boost AD, such as

unemployment aggregate demand and demand expansionary fiscal policy or
so lower real output quantitative easing
and lower derived
demand for workers

Frictional When people switch Labour supply Increase incentives to find work
unemployment between jobs, and quickly, such as reductions in
imperfect information JSA; government measures to
can add to this problem improve efficiency of job search

Real-wage When real wages are Labour supply Supply-side policies to reduce the
unemployment above the market costs of hiring and firing workers;
equilibrium wage and reduce trade union power; cut
so there is an excess other labour costs such as
supply of labour employer pensions
Structural
Structural
Unemployment Types
And Examples of
Poll Answer Key:

A = Frictional Unemployment
B = Structural Unemployment
C = Demand Deficient / Cyclical Unemployment
D = Real Wage or Voluntary Unemployment
E = Seasonal Unemployment
Poll Answer Key:

A = Frictional
B = Structural
C = Demand Deficient / Other
B13 here at end L3
B23 here at end L3
 Check your understanding

TASK: Complete activity 3 - TRUE / FALSE

questions.
 + and -
of unemployment
Task: List the consequences of
unemployment in an economy?
Costs of unemployment
to unemployed
• Loss of ………………….. and a ……………….. living standard in
the present
• Financial ………………….
• Unemployed people have no ability to fulfil their
financial obligations and can become mentally stressed;
rise in domestic violence - breakdown of ………………… &
even suicide.
• The longer the person is out of work, the less _ _ _ _ _ _
_ their work skills will become.
Costs of unemployment
to unemployed
• Loss of confidence and a reduced living standard in the
present.
• Financial instability.
• Unemployed people have no ability to fulfil their
financial obligations and can become mentally stressed;
rise in domestic violence - breakdown of relationships &
even suicide.
• The longer the person is out of work, the less relevant /
obsolete their work skills will become.
 Cost of unemployment to
the local community
• Increase in _ _ _ _ _ rates and
vandalism
Areas with high concentration of
unemployed workers may become
deprived and run-down

• Local shops and businesses may

start moving out of these areas
 Cost of unemployment to
the local community
crime rates and
• Increase in
vandalism
Areas with high concentration of
unemployed workers may become
deprived and run-down

• Local shops and businesses may

start moving out of these areas
Costs of unemployment to the
government
• Government finances worsen
• The budget deficit worsens
• government expenditure on benefits _ _ _ _ _ _ _
• There will be _ _ _ _ _ _ _ _ _ government _ _ _ _ _ _ __
from income _ _ _ , national insurance & _ _ _ revenue
• Government borrowing _ _ _ _ _ _ _
Costs of unemployment to the
government
• Government finances worsen
• The budget deficit worsens
• government expenditure on benefits increase
• There will be decreased government revenue from
income tax, national insurance & VAT revenue
• Government borrowing increases
Costs of unemployment to the whole
economy
• Domestic firms may reduce their _ _ _ _ _ _ _ – GDP will fall leading
to a slow-down in economic growth

• Unemployed workers will significantly decrease their

_ _ _ _ _ _ _ _ spending, which is one of the driving _ _ _ _ _ _ _ _ _
of AD.
• A negative output _ _ _ is developing and the economy is not
producing as much as possible.
Costs of unemployment to the whole
economy
• Domestic firms may reduce their production – GDP will fall leading
to a slow-down in economic growth

• Unemployed workers will significantly decrease their

consumer spending, which is one of the driving components of AD.
• A negative output gap is developing and the economy is not
producing as much as possible.
Costs of unemployment to the whole
economy
• Domestic firms will lose ……………... that could have been
made if there have been full employment.
• Employee morale ………………………. as workers fear that
they are next for the unemployment pile.
• During times of high unemployment, many job seekers
will accept new jobs ………………….. their skill level, a
situation called “underemployment,” which translates to a
loss of human capital for an economy’s labour market.
• Socio-political ………………………. - social unrest and conflict;
increases in poverty
Costs of unemployment to the whole
economy
• Domestic firms will lose profits that could have been
made if there have been full employment.
• Employee morale will decline as workers fear that they
are next for the unemployment pile.
• During times of high unemployment, many job seekers
will accept new jobs below their skill level, a situation
called “underemployment,” which translates to a loss of
human capital for an economy’s labour market.
• There may be socio-political division - social unrest and
conflict; increases in poverty
Determinants of the severity of the impact
of unemployment
 The true impact of unemployment
will depend on two factors:
1) Its rate
A large number of unemployed people cause more problems than a small
number.

2) Its duration
• Normally, the longer one is unemployed the more difficult it is to
find work. Why?
Ø may lose their skills/ less training and development they are receiving
Ø may become dispirited by unemployment and lose their self-esteem and
confidence. This may affect their motivation to work.
Ø financial problems often lead to the unemployed being less healthy (and
then the health service picks up the bill).
 Benefits
of unemployment
Benefits of unemployment
• The unemployed could use their time to re-skill
(learn new skills) or start new businesses.
• Domestic firms have a ……….. pool of workers to
choose from. Firms see a drop in their cost of
production as workers are not in the position to
…………….. their wages
• ………………………….. inflationary pressure may arise.
• The balance of payments should improve as there
will be an increase in exports and
…………………………….. in imports.
Benefits of unemployment
• The unemployed could use their time to re-skill
(learn new skills) or start new businesses.
• Domestic firms have a new/fresh pool of workers to
choose from. Firms see a drop in their cost of
production as workers are not in the position to
negotiate/bargain their wages.
• Negative inflationary pressure may arise.
• The balance of payments should improve as there
will be an increase in exports and a decrease in
imports.
Real-life Case Study
Unemployment: 'I've made 200 applications and
don't have a job’
https://www.bbc.co.uk/news/business-56025926

Questions to discuss:

1) Why do young people in the UK struggle to

find secure, well paid and meaningful jobs?

2) What are the negative effects of unemployment on

young people?
Data Response Question

(and Mark Scheme)

Data response question – exam practice
Data response question – exam practice
Unemployment Multiple Choice Questions
KU Question
Extras
Stimulus Response Question