Who is unemployed? The labour force
Being without a job does not always mean you are unemployed. Economists use three tests. A person is unemployed if they:
- have no paid work,
- are able and available to work, and
- are actively looking for work.
The labour force (also called the working population) is everyone who is employed plus everyone who is unemployed. People who are not looking, such as full-time students, retired people, or people caring for family at home, are not in the labour force.
Underemployment is different: a person has a job but wants more hours, or works below their skill level. Disguised unemployment is common in farming: more people work on a field than are needed, so removing some would not reduce output.
Measuring unemployment
Unemployment rate = (number unemployed ÷ labour force) × 100
Example: labour force 50 million, unemployed 3 million → 3 ÷ 50 × 100 = 6%.
Countries measure it in two main ways:
- Labour force survey: trained workers ask a sample of households who worked, who looked for work, and so on. This follows the international (ILO) definition and allows fair comparison between countries. India's Periodic Labour Force Survey is one example.
- Claimant count: counts people who receive unemployment benefits. It is quick and cheap but misses people who are not allowed to claim.
The employment rate (employed ÷ working-age population) and the participation rate (labour force ÷ working-age population) are also watched.
Types and causes of unemployment
- Frictional: people between jobs, or new graduates searching. Usually short. Better job information cuts it.
- Structural: the pattern of demand in the economy changes. An industry shrinks (coal mining, typewriters) or moves, and workers' skills or locations no longer match the jobs on offer. Can last years.
- Cyclical (demand-deficient): in a recession, total spending (aggregate demand) falls, firms produce less and cut jobs across many industries at once.
- Seasonal: work exists only in certain seasons, e.g. farming, tourism, festival trade.
- Real-wage (classical): wages are held above the level where supply of labour equals demand, e.g. by a very high minimum wage, so fewer workers are hired.
- Technological: machines or software replace workers; a form of structural unemployment.
Natural rate and the Phillips curve
Even in a healthy economy some frictional and structural unemployment remains. The natural rate of unemployment is the level when the labour market is in balance and inflation is steady. In the short run, economists have often seen a trade-off: lower unemployment comes with higher inflation. A graph of this is the Phillips curve. In the long run, most economists argue the trade-off disappears: pushing unemployment below the natural rate only speeds up inflation.
Costs of unemployment and how to reduce it
Costs
- For the person: lost income, lost skills, stress and poorer health.
- For firms: lower sales as people spend less.
- For government: less income tax collected and more spent on benefits.
- For the economy: lost output that can never be recovered (the economy works below its potential), and more poverty and inequality.
Policies
- Demand-side (for cyclical): fiscal policy (more government spending, lower taxes) and monetary policy (lower interest rates) raise spending so firms hire.
- Supply-side (for structural and frictional): training and education, job centres and online job portals, help to move to new areas, and reforms that make hiring easier.
- Seasonal: public works in the off season (India's rural employment guarantee scheme is an example), crop variety and other rural industries.
There are trade-offs: extra spending can raise inflation or debt, and cutting benefits may push people into work but also into poverty.
Key formulas and definitions
- Labour force = employed + unemployed
- Unemployment rate (%) = unemployed ÷ labour force × 100
- Participation rate (%) = labour force ÷ working-age population × 100
- Employment rate (%) = employed ÷ working-age population × 100
- Types: frictional, structural, cyclical (demand-deficient), seasonal, real-wage
Worked examples
1. A town has 40,000 employed and 2,000 unemployed people. Find the labour force and the unemployment rate.
Labour force = 40,000 + 2,000 = 42,000. Rate = 2,000 ÷ 42,000 × 100 ≈ 4.8%.
2. A country's labour force is 80 million and the unemployment rate is 5%. How many people are unemployed?
Unemployed = 5% of 80 million = 0.05 × 80 = 4 million.
3. Working-age population 100 million; labour force 60 million; employed 57 million. Find the participation rate and the unemployment rate.
Participation = 60 ÷ 100 × 100 = 60%. Unemployed = 60 − 57 = 3 million. Rate = 3 ÷ 60 × 100 = 5%.
4. Unemployment falls from 3 million to 2.4 million while the labour force stays at 60 million. By how many percentage points did the rate fall?
Old rate = 3 ÷ 60 × 100 = 5%. New rate = 2.4 ÷ 60 × 100 = 4%. It fell by 1 percentage point.
5. Classify: (a) a software engineer quits and takes 3 weeks to find a new job; (b) coal miners lose jobs when mines close; (c) hotel staff in a hill town lose work in winter; (d) job losses across all industries in a recession.
(a) frictional, (b) structural, (c) seasonal, (d) cyclical.
6. Which policy suits structural unemployment best: cutting interest rates or retraining? Explain.
Retraining. Structural unemployment comes from a skills mismatch; more spending would not give coal miners the skills for software jobs. Lower rates help cyclical unemployment.
Common mistakes
- Dividing by the whole population. The rate uses the labour force (employed + unemployed) only.
- Counting students or retired people as unemployed. They are not looking for work, so they are outside the labour force.
- Thinking zero unemployment is possible or healthy. Some frictional unemployment always exists as people change jobs.
- Using the same cure for every type. Spending helps cyclical unemployment; structural needs training or moving.