Unemployment

Unemployment can be measured in 2 ways and is the number of people who are looking for work but haven’t been in employment for a long period of time. This does not include frictional unemployment which is where workers briefly leave a job to take up another.

Similarly an increase in employment might take place without a fall in unemployment if immigrant workers take these jobs or people join the workforce who had previously chosen not to work.

A rise in unemployment doesn’t necessarily mean that there has been a fall in employment. Migration into an economy or a change in people’s attitudes to work could mean that the size of the labour force can change over time.

Full employment is an economic indicator of growth in an economy. Full employment output is not the maximum employment (if everyone was working) but a situation in which everyone who wants a full-time job can get one. There is also no such thing as zero unemployment as people will always be leaving a job to search for another and this is counted as unemployment but is known as frictional employment.

Initially unemployment was measured by the number of people registered as unemployed and claiming unemployment benefit; the Job Seekers Allowance (JSA).  This is known as the claimant count of unemployment. Claimants have to declare that they are out of work, capable of and actively seeking work whenever they claim their benefit.

A negative of the claimant count is that it includes people who are claiming the benefit but are not actually looking or prepared to work. It also omits some people who would like to work and are looking for a job but are not eligible for the unemployment benefit such as women returning to the labour force after child birth.

Due to these issues, the claimant count has been officially superseded by the International Labour Organisation (ILO) unemployment rate. This is a measure of the percentage of the workforce who are without jobs and are available, willing to work and looking for a job based on the Labour Force Survey. It includes people who have actively sought work in the last 4 weeks and are available to start work within the next 2 weeks or people who have found a new job and are waiting to start it in the next 2 weeks.

A major difference between the 2 measures is that the claimant count is a full count on those claiming benefits whereas the ILO measure is based on a sample.  The difference between the 2 measures is narrower when unemployment is relatively high and wider when unemployment is falling. This may be because low unemployment encourages more people who are not eligible for unemployment benefit to look for jobs whereas they withdraw from the workforce when unemployment rises and they perceive that finding a job will be difficult.

Unemployment can be considered a lagging indicator of the economic situation. We cannot determine whether the economy is growing or declining based on new unemployment figures. For example when a recession begins it might take a few months for people to be made redundant, or firms to go bankrupt. The reason for this is that managers aren’t sure how long the recession will last and so are apprehensive about sacking their workforce which is expensive, only to have to rehire them. Therefore productivity will fall as they reduce output instead.

When this happens unemployment will rise and this will further prove that the economy is declining but the figures may not show this for a few months into the recession. Conversely if the economy is exiting a recession it may be a few months until employment begins to pick up as firms sell previously built up stock. Unemployment may not fall at all even though employment is rising if the jobs are going to new entrants into the workforce. This means that when analysing unemployment figures one should contemplate the state of the economy a few months previously to get an idea of why unemployment may be rising or falling.

There are many costs to unemployment. For the government if someone is unemployed it means they will have to pay out certain benefits (such as JSA) and it also means they will receive less tax. There is a cost to the whole economy as it is no longer working efficiently on its PPF; some resources are idle. Social costs to unemployment, include increased crime rates and a general acceptance of a bad work ethic.

There are 2 causes for unemployment. The first is that wages are too high and will have to fall (to meet equilibrium), this will increase employment but may not be possible due to trade unions and the NMW. The Keynesian view is that unemployment can arise because it is derived demand – if there is not enough demand in the economy for products then there will be high unemployment.

Page last updated on 20/10/13