3.2 Low unemployment — OCR GCSE Economics revision notes

Employment, unemployment and measurement

Employment: Being in paid work, whether employed by someone else or self-employed.
Unemployment: Being of working age, able and willing to work, and actively seeking work, but without a job.
The labour force: Everyone employed plus everyone unemployed — that is, everyone available for work.
The Claimant Count: A measure of unemployment that counts the number of people claiming unemployment-related benefits.

The definition of unemployment excludes more people than students expect, and questions test that. Someone of working age who is not looking for work — a full-time student, someone retired early, someone caring for a relative at home — is not unemployed. They are economically inactive, and outside the labour force altogether.

The Claimant Count is the measure the specification names. Its advantages are that it is cheap to produce, since the data is collected automatically when benefits are claimed, and it is available quickly and every month.

Its weakness is that it counts claimants rather than the unemployed, and those are different groups. Someone unemployed who does not qualify for benefits, or does not claim them, is not counted — so the Claimant Count understates unemployment. And because the rules on who may claim change over time, the figures are not always comparable from one period to another.

The unemployment rate is a percentage, not a headcount:

unemployment rate = (number unemployed ÷ labour force) × 100

The denominator is the labour force — the employed plus the unemployed — not the whole population. Using the total population instead is the standard error in this calculation.

Worked example

A country has a population of 40 million. Of these, 18 million are employed, 2 million are unemployed, and the rest are children, retired or otherwise economically inactive. Calculate the unemployment rate.

Identify the labour force: employed plus unemployed.
That is 18 million + 2 million = 20 million.
Do not use the 40 million population — most of them are not in the labour force at all.
Apply the formula: (2 ÷ 20) × 100.
That gives 10%.

Answer: The labour force is 20 million, so the unemployment rate is (2 ÷ 20) × 100 = 10%. Using the population of 40 million would have given 5%, which would be wrong — the rate measures unemployment as a share of those available for work, not of everyone alive.

The types of unemployment

Figure: The four types

Type	Cause	Example	How long it lasts
Cyclical	A fall in demand across the whole economy during a recession, so firms everywhere cut jobs	Widespread job losses in a downturn, across many industries at once	Until the economy recovers
Frictional	People moving between jobs — they have left one and not yet started the next	A graduate searching for a first job; someone who resigned to look for something better	Short — usually weeks
Seasonal	Demand for the work only exists at certain times of year	Fruit pickers out of season; ski instructors in summer; seaside hotel staff in winter	Predictable, and recurs every year
Structural	The industry itself declines, or the skills needed change, so the jobs do not come back	Coal miners after pit closures; retail staff replaced by online shopping and self-service	Long-term, and often permanent without retraining

Structural and cyclical are the pair that get confused. Cyclical unemployment ends when the economy recovers; structural unemployment does not, because those jobs no longer exist.

Frictional unemployment is worth noting as the type nobody tries to eliminate. A small amount of it is a sign of a healthy labour market — people moving to better jobs — and removing it entirely would mean nobody ever changing employer.

Causes and consequences

Figure: Consequences of unemployment

Affected	Consequences
Individuals	Loss of income and falling living standards; skills decay the longer someone is out of work, making re-employment harder; stress, poorer health and loss of confidence
Regions	Less spending in local shops and services, so other businesses lose trade and cut jobs in turn; falling house prices; young people move away, leaving the area with an ageing population
The government	Lower tax revenue, because fewer people are earning and spending; higher benefit payments at the same time, so the budget position worsens twice over; that money has an opportunity cost — it cannot be spent on schools or hospitals
The economy	Output is lost that can never be recovered, because labour is a resource that cannot be stored; total demand falls, deepening a downturn

The government line is the one that connects to fiscal policy in 3.5: unemployment worsens the budget from both directions at once.

Causes follow from the types. Cyclical unemployment is caused by a fall in total demand in the economy, so the policy response is to raise demand — the fiscal and monetary policies of 3.5 and 3.6. Structural unemployment is caused by a change in what the economy produces, so the response is retraining and education, which are supply side policies (3.7). Matching the type to the policy is exactly what an evaluation question is testing.

One consequence is worth stating carefully because it drives the rest: unemployment tends to be self-reinforcing. Unemployed people spend less, so firms sell less, so firms employ fewer people. Breaking that cycle is why governments treat low unemployment as an objective in its own right.

Common mistake

Someone not looking for work is not unemployed — they are economically inactive and are not in the labour force. The unemployment rate uses the labour force as its denominator, not the population.

Before you practise

Unemployment means able, willing and actively seeking work but without a job.
The labour force is the employed plus the unemployed; everyone else is economically inactive.
The Claimant Count measures those claiming unemployment benefits — quick and cheap, but it understates unemployment.
unemployment rate = (unemployed ÷ labour force) × 100.
Cyclical unemployment comes from a fall in demand in a recession.
Frictional unemployment is short-term movement between jobs.
Seasonal unemployment recurs at the same point each year.
Structural unemployment follows the decline of an industry, and is long-term.
Consequences fall on individuals, regions, the government and the economy.
The government loses tax revenue and pays more in benefits at the same time.

Employment, unemployment and measurement

The types of unemployment

Causes and consequences

Before you practise

Now practise it