0455 · 4.6Employment and unemployment

Employment, unemployment and labour force

0:00A factory closes, a worker searches for a better job, and a seaside hotel shuts during winter. Each situation can leave someone without paid work. However, the causes are different, so the most effective solutions will also differ. By the end of this video, you will understand how unemployment is measured, why it happens, and how governments can reduce it. Labour is the human effort, physical and mental, used in production.

0:22Firms need workers because making goods and providing services require people with suitable skills. Their hiring decisions depend partly on how much they expect to sell. When sales fall, a business may need fewer staff, while an expanding industry can create new opportunities. Employment is the use of labour in paid work. This includes people working for an employer and those working for themselves. A café owner and a paid waiter both belong to this category.

0:47Someone working part-time also counts, even if they would prefer longer hours. The measure records only whether a person has paid work. Unemployment refers to working-age people who are able and willing to work, actively seeking work, but without a job. Each condition matters when classifying someone. A person applying for vacancies after losing their position meets these conditions. A full-time student who is unavailable for work belongs outside this group, as does someone who has retired and stopped searching.

1:14The labour force consists of employed and unemployed people. It therefore includes those already working and those available for jobs who are actively searching. People outside these categories are described as economically inactive. This distinction helps us identify the relevant group when measuring unemployment. We compare jobseekers with participants in the labour market. Full employment occurs when everyone who wants a job has one, apart from some frictional unemployment. Unemployment is therefore very low.

1:41Frictional unemployment occurs while people move between jobs or enter the labour market. Even a healthy economy needs time to match applicants with vacancies. Someone leaving a café position may spend several weeks finding suitable work elsewhere.

Measuring the unemployment rate

1:54The measurement of unemployment uses a labour force survey. This asks a sample of households whether people are working or seeking work. Interviewers also establish whether those without jobs are available to start. The results are used to estimate totals for the population. This approach follows the International Labour Organization method and allows comparisons using consistent categories. The unemployment rate expresses the unemployed as a percentage of the labour force.

2:17It equals the number unemployed divided by the labour force, multiplied by one hundred. Dividing gives the proportion of labour market participants without work, and multiplying by one hundred turns it into a percentage. The denominator includes both people with jobs and those actively seeking them. Suppose an economy has forty-six thousand employed people and four thousand unemployed people. Add these groups to obtain a labour force of fifty thousand people.

2:42Four thousand divided by fifty thousand gives zero point zero eight. Multiply that result by one hundred to obtain an unemployment rate of eight per cent. Eight in every hundred labour force participants are unemployed. A survey gives an estimate, so its results can contain sampling error. Classification also affects what the headline rate reveals. Someone who gives up searching becomes economically inactive under this method. The measured rate could therefore fall even without additional hiring.

3:09To interpret a change properly, consider whether people have found jobs or left the labour force.

Types of unemployment

3:13The causes and types of unemployment explain different obstacles to finding work. With frictional unemployment, suitable vacancies exist, but applicants need time to find them. A school leaver may compare opportunities before accepting an offer. Employers also need time to advertise and interview candidates. Better information can shorten this matching process and reduce the period spent without work. Structural unemployment is caused by long-term changes in the economy, such as the decline of an industry or new technology.

3:41Workers’ skills or locations then no longer match the available jobs. In coal mining, for example, former miners' homes may be far from expanding industries, and their experience may not match the qualifications required. Vacancies can therefore exist alongside joblessness. Retraining and help with relocation address these barriers. Technology can also cause structural unemployment when machines replace particular tasks. Workers affected by automation may need different skills to enter growing occupations.

4:09The transition towards cleaner energy can create a similar challenge for communities dependent on declining industries. New jobs in renewable energy offer opportunities, but affected workers need practical routes into them. Well-planned training lets environmental sustainability and employment grow together. Cyclical unemployment is caused by falling total demand during a downturn in economic activity. Total demand is spending on goods and services across the economy. A recession is when real Gross Domestic Product falls for two consecutive quarters.

4:37As customers cut purchases, firms sell less and reduce production. They may dismiss staff because fewer workers are needed to produce the smaller quantity of output. Seasonal unemployment arises in activities such as tourism and farming when demand for workers changes at different times of the year. A seaside hotel may hire extra staff during the tourist season, then reduce staffing during winter. Agricultural workers can face similar gaps after a harvest ends.

5:02These patterns follow recurring changes in activity. They can happen even when the wider economy is performing well.

Consequences of unemployment

5:08For individuals, the consequences of unemployment often begin with lower income. Benefits, where available, may replace only part of their previous earnings. Households can then struggle to afford essentials or repay debts. Prolonged unemployment may also cause stress and reduce confidence. Skills can deteriorate through lack of practice, which makes a return to work more difficult. Producers can lose sales because unemployed households have less money to spend. Lower revenue may reduce profits and discourage expansion.

5:35Firms might then cut further jobs, which weakens spending again. However, businesses still hiring may find a larger pool of applicants. Recruitment can become easier when those applicants have suitable skills and can reach the workplace. The government receives less income tax when fewer people earn wages. Reduced household spending can also lower receipts from taxes on purchases. At the same time, expenditure on unemployment benefits may rise. This places pressure on public finances.

6:02Resources used to support jobseekers then have an opportunity cost because other public services could have received that funding. For the economy, unemployment means labour is underused and potential output is lost. A production possibility curve shows the maximum combinations of two goods achievable with available resources and technology. Point A lies inside the curve because unemployed workers leave resources not fully employed. Putting those workers into jobs moves production from point A towards point B on the curve, provided other necessary resources are available.

6:31Persistent joblessness can also increase poverty and widen income differences. Communities may suffer when a major employer closes and local shops lose customers. Over time, the loss of skills can weaken productive capacity. These effects explain why governments consider both immediate support and longer-term solutions. The best policy addresses the particular barrier preventing people from obtaining work.

Policies to reduce unemployment

6:54Fiscal policy uses government spending and taxation to influence economic activity. To reduce cyclical unemployment, a government could increase spending on building hospitals. Contractors hire workers, purchase materials and pay wages. Those earnings support additional household spending, which raises sales elsewhere. Firms experiencing stronger demand may increase production and employ more people. Lower income tax offers another route because workers keep more of their earnings. If households spend the extra money, firms receive more orders and may recruit staff.

7:24Some people will save it, so the employment effect can be smaller than expected. Additional public spending can also require borrowing. Projects take time to organise, and poorly targeted expenditure may create few lasting jobs. Monetary policy uses interest rates and the money supply to influence economic activity. An interest rate is the cost of borrowing expressed as a percentage of the amount borrowed. Lower rates can encourage households to finance purchases and firms to expand.

7:49Stronger spending raises demand for output, so employers may hire more workers. This approach is particularly relevant to cyclical unemployment. The effectiveness of lower interest rates depends on the response of households and businesses. People worried about future income may avoid taking loans. Firms with unused capacity may postpone expansion even when finance becomes cheaper. Demand policies also become less suitable as spare capacity disappears. Additional spending can then raise prices because output cannot expand enough to meet it.

8:18Supply-side policies aim to increase the economy’s productive capacity and efficiency. Education and retraining can reduce structural unemployment by preparing workers for available occupations. For example, former mining employees could learn skills needed to maintain renewable energy equipment. Training needs to match genuine vacancies and be accessible to participants. Its effects take time, and success requires employers to offer suitable positions. Improved transport and assistance with moving costs can help workers reach jobs in other areas.

8:48Such support addresses geographical barriers to employment. Family responsibilities and expensive housing can still limit relocation. A government might also subsidise firms that hire unemployed people by paying part of each new recruit’s wage. Careful targeting helps support additional jobs and limits payments for hiring that would have happened anyway. Frictional unemployment responds particularly well to job centres, vacancy websites and careers advice. These services connect applicants with employers and make opportunities easier to find.

9:17Faster matching shortens the time between positions. Their effectiveness depends on accurate information and accessible services. Better advertising cannot create jobs, so it works best where suitable vacancies already exist. Seasonal unemployment can be reduced by encouraging a wider range of activities throughout the year. A coastal area could develop indoor attractions or conference facilities to support winter employment. Training might also help workers switch occupations between seasons. These approaches require customers and viable businesses.

9:46Public support has limited value if the new activities cannot attract enough demand to sustain jobs. Lower unemployment benefits can increase the financial incentive to accept work. However, successful employment also requires suitable vacancies, affordable travel and practical childcare arrangements. Reduced support can cause hardship when these obstacles remain. A stronger policy package tackles barriers alongside incentives. Success is best judged by how many people move into lasting jobs, alongside changes in the recorded unemployment rate.

Exam technique and retraining evaluation

10:15In multiple-choice questions, look for the feature that identifies the cause. Movement between positions indicates frictional unemployment, while a lasting mismatch of skills points towards structural unemployment. When a question describes a general fall in spending, choose cyclical unemployment; job losses that return each year at the same time are seasonal. Remember that full employment still includes some frictional unemployment. For calculations, locate both parts of the labour force before applying the formula.

10:43The command word define asks for a precise meaning; state requires an answer expressed in clear terms. When asked to explain, set out the reasons why or how something happens. Analyse goes further by examining relationships in detail. For example, connect lower sales to reduced production and then to fewer workers being required. Each step should lead towards the outcome requested. Consider this exam-style question: discuss whether government spending on retraining will reduce unemployment.

11:10Discuss requires an issue to be explored in depth, with both sides presented in a structured way. Start by identifying the problem that training addresses. Then explain its benefits, consider limitations, and reach a supported judgement. The answer should link the policy to actual opportunities for employment. Government spending on retraining can give unemployed workers the skills required by expanding industries. This improves their suitability for available vacancies. Employers can then recruit applicants who previously lacked the necessary qualifications.

11:39The policy can therefore reduce structural unemployment. Its value is particularly strong where expanding industries have unfilled vacancies because applicants lack the right skills. However, courses take time, and participants may struggle to cover travel or childcare costs. Some qualifications may have little relevance to local employers. During a recession, firms may offer too few vacancies to absorb those who complete training. On balance, government spending on retraining will usually reduce unemployment when it is structural, because courses that match genuine vacancies move workers into those jobs.

12:11In a recession, it works best alongside policies that raise total demand. Employment and unemployment concern both access to work and the use of an economy’s labour resources. The unemployment rate compares active jobseekers without work with the whole labour force. Frictional, structural, cyclical and seasonal unemployment arise from different causes. Those differences explain why vacancy information, retraining, spending policies and year-round activities serve different purposes. The consequences extend from household income to business sales, government finances and lost national output.

12:44Effective policy begins with an accurate diagnosis of the cause. It also considers costs, delays and whether suitable vacancies will actually become available. Understanding those connections allows you to explain unemployment clearly and judge proposed solutions with evidence and reasoning.