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Employment and unemployment, employment, unemployment, PPF,

3. Employment and Unemployment

Employment and unemployment. This article will explain what unemployment is and how it is measured. Furthermore, the article will discuss the causes of unemployment and the difference between unemployment and underemployment.

WHAT IS EMPLOYMENT AND UNEMPLOYMENT?

There are a few technical terms needed to understand what employment and unemployment is:

  • Workforce – The number of people who are willing, able and of age to work in an economy.
  • Employed – People who are in work
  • Unemployed – People who are willing, able and of age to work but are not currently employed.
  • The level of employment – The level of employment refers to the number of people who are in work.
  • The rate of employment – The rate of employment refers to the proportion of people who are working relative to the workforce of the economy.
  • The level of unemployment – The level of unemployment refers to the number of people who are out of work
  • The rate of unemployment – The rate of unemployment refers to the proportion of people who are not working relative to the workforce of the economy.

UNEMPLOYMENT VS UNDEREMPLOYMENT

Underemployment is when individuals are employed but they are not given enough hours to earn a wage they want/expect given their qualifications.

For example, a worker running an ice-cream van may not be able to work every day due to the weather and therefore they might have to work another job to make up his income.

Underemployment is important because it exposes misleading unemployment figures.

An example of this is during the 2008 Financial Crisis where, although unemployment rose, it did not seem as much as past recessions (Tech Bubble etc) however, underemployment skyrocketed by 50%.

HOW IS UNEMPLOYMENT MEASURED?

There are 2 main ways of measuring unemployment:

THE INTERNATIONAL LABOUR ORGANISATION (ILO)

The International Labour Force uses the Labour Force Survey. This is the official measure used in the UK and is compulsory for every EU state to use the same method.

The Labour Force Survey consists of surveys of 80,000 households every month. The survey asks questions regarding the economic activity of the household as well as basic demographic questions such as age, gender, and ethnic background.

To be classed as unemployed a person must be out of work for the past 4 weeks and has not been looking for a job during the 4-week period.

THE CLAIMANT COUNT

The claimant count measures unemployment by counting the number of people who are claiming benefits for being unemployed (known as the Job Seeker’s Allowance).

There are a few limitations with this approach to measuring unemployment. For example, there is a stigma against claiming benefits, therefore not everyone who is eligible claims them making the figure smaller than it should be.

 Also, there are very fine criteria in order to be eligible for the benefit; if you resigned from your job you cannot claim benefits.

Furthermore, the figure is easily manipulated by the government as they can change the way the claimant count is calculated in order to reduce the political pressure that may come with a high figure of unemployment.

Lastly, the claimant count is not a global measure of unemployment and therefore it cannot be used to compare the unemployment levels of countries.

CAUSES OF UNEMPLOYMENT

There are many causes of unemployment. The following are the main reasons why people are unemployed:

  • Structural unemployment – Structural unemployment occurs when the demand of labour is less than the supply of labour in a specific labour sector. An example of this is when steel factories were moving overseas, away from Britain, it caused unemployment because the demand of labour was reduced.
  • Fictional unemployment – When a person loses their job quickly moves onto another job, this is known as frictional unemployment. It is short term and there will always be frictional unemployment in most economies, and it is not seen as a dangerous problem.
  • Cyclical unemployment – Most economies and businesses go through cycles of high growth and periods of slowdowns. During the slowdown phase, where profits and revenues are falling firms will choose to make workers redundant to offset the losses/decrease in profits.
  • Seasonal unemployment – Many people may work in industries which offer jobs on a seasonal basis. An example of this is a person working at a ski resort where, for the most part of the summer, they would have no job as the ski resort is not open, hence they will be laid off.

DIAGRAMS TO SHOW UNEMPLOYMENT

We can use the PPF to show unemployment. To find out more about the PPF click here.

The PPF below shows that at point B there is unemployment because there is an inefficient allocation of resources because point B is inside the PPF. At point A there is no unemployment as it lies on the PPF.

Screenshot 10

WHAT ARE THE EFFECT OF UNEMPLOYMENT?

Unemployment effects three different groups:

  • Consumers – Consumers will have lower incomes and therefore living standards will fall. However, there are many other non-financial related repercussions of unemployment such as a decline in morale among consumers and further problems for families.
  • Government – Governments will have to pay more in benefits and will take in less tax in order to encourage spending to try and stimulate the economy. However, in order to run a deficit the government must sell bonds which reduces the PPP in the future when they have to pay back the bond owners.
  • Firms – Because people are unemployed, firms will find that consumers will spend less. This may cause firms to reduce prices which could reduce revenue unless the increase in demand can offset the loss in revenue due to lower prices. (Learn about price elasticities here).

In conclusion, the distinction between unemployment and underemployment is important to understand because the rate of unemployment may be misleading like during the 2008 Financial Crisis. Furthermore, there many reasons why unemployment can take place, some can be very harmful to an economy and can have long-term implications, and some causes of unemployment occur due to the natural cycle of an economy.

Feel free to ask any questions and sign up below for the latest updates. Click here for more articles. For more articles in the Economics for Beginners series, click here

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