Employment and Unemployment

Unemployment rate = (unemployed ÷ labour force) × 100 (1) = (1.5 ÷ 25) × 100 = 6% (1).

Frictional unemployment (2 marks) is short-term unemployment that occurs when workers are between jobs — having left or lost one job, they spend time searching and applying for another. For example, a person who has just left one job and is looking for a better one is frictionally unemployed. Seasonal unemployment (2 marks) is caused by regular seasonal changes in demand for labour at different times of the year. For example, a ski instructor out of work in summer, or farm workers with little to do in winter, are seasonally unemployed. Both are usually temporary.

A recession is a period of falling real GDP, and it causes unemployment through a fall in demand. In a recession, households and firms spend less, so aggregate (total) demand falls. Because firms are selling fewer goods and services, they cut back production. With less to produce, firms need fewer workers, so they make workers redundant and stop hiring — this is cyclical (demand-deficient) unemployment. The newly unemployed then have less income to spend, which reduces demand further and can cause even more job losses (a downward multiplier effect). Some firms may also go out of business entirely, adding to unemployment. So a recession causes unemployment because lower demand leads firms to produce less and therefore employ fewer workers.

Government-funded retraining helps reduce structural unemployment, which is caused by a skills mismatch — the unemployed lack the skills that the available jobs require. By paying for retraining and vocational courses, the government gives unemployed workers the skills that growing industries actually demand, for example digital or technical skills. Once workers have these skills, they become employable and can fill the vacancies that previously went unfilled, so unemployment falls. Retraining also makes the workforce more flexible and productive, so workers can move into new industries as the economy changes, reducing future structural unemployment too. The main limitations are that retraining is expensive and takes time to complete, so the effect is gradual rather than immediate. Overall, retraining reduces unemployment by closing the skills gap that causes it.

Unemployment is a serious problem, but whether it is the most serious is debatable. Why it is very serious: unemployment means lost output, so the economy produces below its potential and living standards are lower; it strains government finances (more benefits, less tax revenue); and it causes severe social costs — poverty, poorer health, and higher crime — concentrated on the unemployed and their families. Why other problems may be worse: high inflation can erode everyone's incomes and savings and destroy confidence in money; a balance of payments crisis or large government debt can force painful cuts; and low growth can trap a country in poverty over the long run. Problems are also linked — a recession can cause both unemployment and falling output at once. Judgement: unemployment is one of the most serious problems because of its heavy human and economic costs, but it is not always the most serious — for a country suffering hyperinflation or a debt crisis, those may do more damage. Which problem is most serious depends on the country's circumstances, though the human cost of unemployment makes it a top priority in most cases.

Supply-side policies can reduce unemployment, but 'always' is too strong. Why they often work: measures such as education and retraining give the unemployed the skills firms need, directly reducing structural unemployment; improving information and labour mobility reduces frictional unemployment; and reducing very high benefits or labour-market regulation can strengthen the incentive to work and make firms more willing to hire. These tackle the causes of unemployment, so they can be lasting. Why they might not always work: if unemployment is cyclical, caused by low demand in a recession, then better-skilled workers still cannot find jobs because the jobs do not exist — here demand-side policy is needed instead; supply-side policies are also slow (training takes years) and expensive, and some, like cutting benefits, may cause hardship. Judgement: supply-side policies are very effective against structural and frictional unemployment because they fix skills and matching problems, but they are not always effective — against cyclical unemployment they achieve little, and they work only slowly. So their effectiveness depends on the type of unemployment and the time available, which is why 'always' cannot be accepted.