• Created by: ekenny5
  • Created on: 04-02-21 10:21


The unemployed are those people able. available and willing to work but cannot find a job despite an active search for work.

  • means the scarce resources of an economy are not being used in the most efficient way to produce goods and services which satisfy consumer needs and wants 
  • economic and social costs are both a result of long term high unemployment 
  • though unemployment in the UK is falling, but there are limits to how far joblessness can drop without affecting other macro aims 
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Voluntary vs Involuntary

Involuntary (demand side):

  • techology leading to structural unemployment 
  • external shocks (eg covid, spike in commodity prices)
  • cheaper production overseas (outsourcing)
  • recession (decreased AD, decreased need for jobs)

Voluntary (supply side)

  • less incentive to work (benefits outweigh wage)
  • National Minimum Wage is low (not adjusted for inflation)
  • income tax is 'too high'
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Key Terms

Claimant Count - the number of people oficially claiming unemployment-related benefits - part of universal credit. Must be activley seeking work

Labour Force Survey - all those activley seeking and available for work, weather or not claiming benefits. (a survey of 33000 households to assess working situations)

Long-term unemployment - people unemployed for at least one year

Labour Force - number of people of working age who are willling, able and available to work

Full employment - when there are enough unnfilled job vacancies for all the employed to take work

Discouraged workers - people out of work for a long time who may give up on job search and effectivley leave the labour market 

Economically inactive - those who are of working age but are neither in work nor activley seeking paid work

Employment rate - % of the population of working age in full time employment or part-time paid work

Unemployment rate - %of the economically active population who are unemployed

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Ways of measuring unemployment

The Claimant count and the labour force survey are used to measure unemployment 

Accuracy of the data

  • + timley figures each month
  • + large sample size (33000 in the LFS)
  • + local and regional jobless data help policy
  • + In the UK there is a low level of benefit fraud 
  • - much hidden unemployment 
  • - sample errors are inevitable 
  • - high level od under-employment 
  • - high rate of labour migration affects accuracy
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Types of Unemployment

Seasonal - regular seasonal changes in employment/ labour demand eg tourism, retail, agriculture and construction 

Structural - arises from the mismatch of skills ad job opportunities as the pattern of labour demand changes - linked to labour immobility

Frictional - transitional unemployment due to people moving between jobs eg new entrants to the labour market

Cyclical - caused by a fall in persistent weakness of aggregate demand leading to a decline in real GDP and jobs 

Cyclical unemployment is due to a lack of demand for goods and services. In a recession, firms are likley to reduce employment to cut costs - this is 'labour shedding' or 'down sizing'. Cyclical unemployment has been a major problem for many European Union economies

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Structural Unemployment

When demand for labour is less than the supply of labour in an individual labour market. Caused by: 

  • decline in manufacturing 
  • occupational immobility (skills)
  • geographical immobility
  • robotics replacing jobs
  • Forgein competition - rising imports 
  • long term regional decline (eg mining regions)
  • disincentivising eg the poverty trap
  • outsourcing of production overseas 
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Effects of high unemployment

Economic effects:

  • lost output, economy is inside the PPF - lost efficiency 
  • fall in real incomes and lower living standards for those affected 
  • drop in tax revenues and higher welfare - budget deficit
  • possible decline in labour supply as unemployed more overseas 

Social costs:

  • increase in relative poverty and welfare benefit dependency 
  • extra demands on NHS (eg stress related illness)
  • link between persistet unemployment and social problems 


  • reduced risk of inflation - decreased wage claimed and price discounts 
  • larger pool of unemployed labour available for growing businesses 
  • rise in self employment start ups 
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Labour Scarring Effects

Loss of work experience:

  • reduced employability from a depreciation of skills
  • gaps in CVs may influence potention employers 
  • decline in quality of human capital

Loss of current and future income:

  • vulnerability to consumer debt at high interest rates
  • decline in physical health and increase in psychological stress - less likely that someone will find work again 

Changing pattern of jobs in the economy:

  • new jobs in recovery stage are different from lost ones 
  • structural unemployment - ie occupational immobility - makes it harder to get people into new jobs 
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Monetary Policy

Monetary policy - decreased interest rates to increase AD (demand side policy)

  • decreased interest rates will increase consumption (^MPC and lower MPS)
  • ^consumption ^AD which can increase growth and ^ the need for employment to meet growing demand 
  • - this could leave to demand pull inflation, which negativley effects lower income households if wages aren't adjusted with inflation (^the inequality gap)
  • HIDO - confidence, even if interest rates are very low, if consumers and businesses are very low on confidence, the rates won't make much of a difference if consumers feel that they need to save their money. there are also other components of AD to consider 
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Fiscal Policy

Cutting income tax to increase AD (demand side policy)

  • cutting tax income increases disposable income of consumers and increases the incentive to join the labour force (^disposable income ^MPC)
  • ^consumption ^AD which again ^ the need for workers in the growing economy 
  • - decreased tax revenue for the government, which could force them to decrease government spending (so lesser public services)
  • - the budget deficit will increase 
  • - increasing AD may cause demand pull inflation due to scarce resources in the economy
  • HIDO - increasing disposable income for consumers may increase their MPS rather than MPC, as they can now afford to save so they may choose to 
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Educational and Training schemes

Investing in education or incentive programs for firms to train employees (supply side policy)

  • increasing investment in the education system could cause more educated and skilled employees, so making more employable for people for businesses
  • Investing in apprenticeship grants or training incentives encourages firms to take on employees and train them, as they will be rewarded by government 
  • - increases government spending so may increase the budget deficit
  • - higher trained workers may demand higher wages, which could increase costs of production for the business, and could shift supply inwards
  • HIDO - weather the rewards from the government are worth the increased time and money involved in training new employees
  • HIDO - employees may not be willing to learn new skills, especially if they are part of the long term unemployed. If they are willing to learn, this still may take years before its effective 
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Lower Minimum Wage

Supply side policy 

  • lower minimum wage would decrease the costs of a business terms of wages and salaries 
  • this could encourage them to employ more staff as they can now afford it 
  • - this could decrease the welfare of the employees if they experience a pay cut or just lower wages
  • - may decrease AD as consumers have less disposable income to spend on goods and services within the economy
  • HIDO - if decreasing the welfare of consumers is worth the lower costs.
  • HIDO - employees may strike against these changes or leave this country to go somewhere where the minimum wage is higher (brain drain or decreasing labour force)
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Geographical Subsidies

Encourgaing firms and workers to move, or decreasing geographical immobility (supply side)

  • encouraging firms to move out of places like London and up to the North where it's cheaper
  • could employ people all over the UK rather than just in the south east, but also cuts the costs of the businesses so they could also expand by hiring
  • Investments like HS2 also allow consumers and firms to move around the country easier, therefore cutting costs
  • - projects and subsidies are expensive to the goverement, so increase the budget deficit 
  • - HS2 has taken a lot longer than expected, and the price has been rising as a result since the beginning of construction
  • HIDO - consumers or businesses may not be willing to move, depending on their connection with the area they are in
  • HIDO - the costs of moving the business elsewhere may be more than the higher cost of saying, or less than the government subsity on offer, making it not worth while
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Stricter Benefit Requirements

Supply side policy 

  • making it more difficult to get benefits or making them lower could force consumers to get work if they can't access benefits or if they can't live soley off benefits
  • may decrease government spending so would decrease the budget deficit
  • - welfare of consumers may decrease, and some families may suffer the benefit cuts but are uable to get a job to cover living costs
  • - consmers being worse off than before. children may be affected though they are unable to control anything 
  • HIDO - unproductive people in employment, which could cost more to employ than the cost of benefots in the first place
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Barriers for Lowering Unemployment

High levels of long term structural unemployment in the UK

pockets of exceptionally high unemployment and low economic activity rates, high youth unemployment 

Hard to overcome the disincentive effects of:

  • a complex welfare beenfits and tax system
  • unaffordable housing sector (buying and renting)
  • low paid jobs keeping families in relative poverty
  • high costs and uneven availability of quality child care

Many people are underemployed or stuck in part-time jobs 

Skills shortages, creaking infrastructure and huge variations in educational performance and opportunities (eg grammar and private schools)

Weak demand in domestic and export markets eg EU. (cyclical unemployment as less growth due to less demand for our exports)

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Benefits of Falling Unemployment

  • increased employment boosts real GDP, helps to lift living standards and aggregate demand 
  • more people in work creates extra tax revenue for the government either to lower the defifcit or increase spending 
  • social costs of high unemployment are severe, progess in cutting it has importat economic and social benefits (decreasing poverty)


  • extra spending from expanding labour market might worsen the budget deficit
  • risk of an acceleration in demand pull and cost push inflationary pressures if unemployment falls rapidly
  • fewer spare labour will mean a rise in unfilled vacancies; labour shortages might put off inward investment (FDI). (we become less competitive as a country)
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