2.1.3 Employment and Unemployment (Edexcel)

Question 1

What are the measures of unemployment?

Answer 1

1. Claimant Count
2. International Labour Organisation (ILO)’s UK Labour Survey

Question 2

Explain what the claimant count is

Answer 2

This simply counts the number of recipients of Job Seeker’s Allowance (JSA) added to those who
must be looking for work in order to claim Universal Credit (UC)

Question 3

What are the advantages of the claimant count?

Answer 3

1. Accurate in the sense that an exact number of people who claim unemployment benefit can be calculated –
   this also makes it an inexpensive measure
2. It is easy to classify whether someone is actively seeking work or not
3. It is easy to see regional / local differences in unemployment patterns
4. The data is produced monthly

Question 4

What are the disadvantages of the claimant count?

Answer 4

1. There are a lot of unemployed people who do not meet the criteria for collecting unemployment benefits (i.e. they are ineligible perhaps because they have savings, or a partner who is in employment, or are under 18)
2. People might be too proud to claim – part of the problem of calculating the scale of hidden unemployment

Question 5

Explain what the ILO’s definition of unemployment is.

Answer 5

The ILO defines unemployment as individuals of working age who are without work, actively seeking work, and available for work.

Question 6

Explain what the UK labour force survey is.

Answer 6

• The UK Labor Force Survey is the primary source of unemployment data in the UK and follows the ILO definition.
• This asks around 60,000 households to self-classify as either employed, unemployed or economically inactive.

Question 7

Explain underemployment

Answer 7

Under-employment occurs when people are counted as
1. Looking for an extra job or actively searching for a new job with longer hours to replace their current job
2. Preferring to work longer hours in their current job
3. Under-utilised in terms of their ability / qualifications / experience

Question 8

What is employment rate?

Answer 8

Measures the proportion of the working-age population in employment. A rising employment rate indicates economic growth.

Question 9

What is unemployment rate?

Answer 9

Measures the proportion of the labor force actively seeking work. A high unemployment rate indicates economic problems.

Question 10

What is inactivity rate?

Answer 10

Measures the proportion of the working-age population that is not in the labor force. It can indicate a lack of job opportunities or demographic factors.

Question 11

What are the types of unemployment?

Answer 11

• Structural Unemployment
• Frictional Unemployment
• Seasonal Unemployment
• Demand Deficiency/ Cyclical Unemployment
• Real Wage Inflexibility

Question 12

Explain the causes of structural unemployment

Answer 12

• Structural unemployment is mainly caused by lack of suitable skills for the jobs available; a result of deindustrialisation in an economy.
• Another cause of structural unemployment is occupational immobility – this refers to workers being unable to move between different types of jobs and sectors, usually because of a lack of
  relevant skills/qualifications
• We can also consider geographical immobility – this occurs when workers are unable to move to find work, perhaps because transport systems are poor, or because of the cost of living there (e.g. the cost of living in London is much higher than in the North East of England, for example, preventing people from the North East from looking for work in London)
• Often people remain unemployed because of disincentive effects including the poverty trap

Question 13

Explain how frictional unemployment, who it affects and how it can be reduced

Answer 13

• Frictional unemployment is caused by workers seeking a better job or who are in-between jobs
• It also affects those people who are new entrants to the labour market such as school and college leavers
• There is always some frictional unemployment in the labour market regardless of the economic cycle
• Frictional unemployment can be reduced by making information on jobs more widely available and also
  making job search more affordable e.g. with cheaper transport

Question 14

What is seasonal unemployment and give examples of seasonality

Answer 14

Seasonal unemployment occurs when seasonal workers are without jobs due to the time of year where there are
seasonal changes in employment e.g. fruit-pickers in summer, retail jobs pre-Christmas
Seasonality refers to fluctuations in output and sales related to the seasons of the year. For example, demand for stockings peaks in the run up to Christmas.

Question 15

Explain how cyclical unemployment happens and when it can happen

Answer 15

• Cyclical unemployment is caused by weak aggregate demand in the economy, reducing the demand for labour in an economy
• When aggregate demand falls, this will cause a contraction in national output and some businesses may make workers redundant as a result.
• The demand for labour is derived from demand for (and spending on) goods and services
• Cyclical unemployment can rise quickly in a recession, but it can also increase in a period of slow growth

Question 16

What is real wage inflexibility?

Answer 16

When wages are too high, leading to job cuts or an unwillingness to hire.

Question 17

How can migration impact employment?

Answer 17

Migration can impact employment by changing the supply of labor in specific regions. Immigrants may fill labor gaps, but this can also lead to wage pressures.

Question 18

How can skills impact employment?

Answer 18

Skills are crucial for employment. A highly skilled workforce is more adaptable and less prone to unemployment in a changing economy.

Question 19

What are the effects of unemployment on consumers (not workers)?

Answer 19

Reduces income which can lead to lower consumer spending, impacting businesses.

Question 20

What are the effects of unemployment on firms?

Answer 20

High unemployment can lead to a larger labor pool, potentially reducing wage pressures.

Question 21

What are the effects of unemployment on workers?

Answer 21

Lost income, reduced job prospects, and psychological stress.

Question 22

What are the effects of unemployment on governments?

Answer 22

Increased spending on unemployment benefits and lost tax revenue, social issues.

Question 23

What are the effects of unemployment on society?

Answer 23

Social unrest, reduced well-being, and inequality.

Question 24

Give a real world example of unemployment.

Answer 24

During the 2008 financial crisis, structural unemployment increased as workers in declining industries (e.g., manufacturing) struggled to find jobs in growing sectors (e.g., technology). This highlighted the importance of retraining programs and skills development to address unemployment issues.

Question 25

What are the advantages of the labour force survey?

Answer 25

1. Because the same methodology is used in many countries, it allows inter-country comparisons
2. The criteria for assessing unemployment has changed very little over time, and so it allows good quality timeseries
   comparisons

Question 26

What are the disadvantages of the labour force survey?

Answer 26

1. Because it is a survey of only 60 000 households, there will be sampling errors – and not everyone who is
   unemployed can be counted
2. It is costly and time-consuming to carry out
3. It is only conducted quarterly, so may not pick up changes in the labour market very quickly

Question 27

What is the poverty/unemployment trap?

Answer 27

• This is a situation in which there is little financial incentive for someone who is unemployed to start working
  because the combined loss of welfare benefits and a need to pay income tax and other direct taxes might
  result in them being worse off.

Question 28

Explain what things allow for real wage inflexibility?

Answer 28

• The existence of trade unions, with their ‘collective bargaining’ pushing up wages above the free market
  equilibrium; this causes the supply of labour to be greater than the demand for labour
• The existence of minimum wages, which are in theory set above the free market equilibrium again causing supply of labour to be greater
  than demand for labour

Question 29

What is economic inactivity?

Answer 29

Economic inactivity is that section of the working age population which is not in employment and is not actively seeking
a paid job. These persons are therefore not part of the working population; they are neither employed nor
unemployed.

Question 30

What are the reasons for economic inactivity?

Answer 30

• Student remaining in full-time education / training
• Retired people who are done with work
• Discouraged workers who have given up active search for work

Question 31

Explain how long term unemployment is a structural problem in the labour market

Answer 31

• Long term unemployment accounts for people who have been out of work for at least one year
• The longer people are without a job, the harder it is for them to find their way back into employment
• One reason is that people’s skills tend to worsen due to economic inactivity. Motivation to search for a job
  also suffers the longer someone is out of work.
• This, in turn, can lead to hysteresis – the total amount that can be produced by the labour force actually starts
  to fall, as workers de-skill
• Employers often favour people with a consistent record of being in work rather than those who have gaps in
  their CV
• Youth unemployment can be particularly problematic as it can easily become long-term unemployment

Question 32

What are some of the economic and social costs of unemployment?

Answer 32

• Slower long-run rate of economic growth
• Risks of a period of price deflation because of falling aggregate demand
• Rising income inequality
• Erosion of people’s skills (human capital) especially arising from long-term unemployment
• Fiscal (budget) deficit increases as tax revenues shrink and welfare spending increases

Question 33

How is loss of work experience a consequence of unemployment?

Answer 33

• Reduced employability from a depreciation of skills
• Gaps in CVs may (negatively) influence potential employers
• Decline in quality of human capital

Question 34

How is loss of current and future income a consequence of unemployment?

Answer 34

• Higher vulnerability of the unemployed to consumer debt at high interest rates
• Decline in physical health and increase in stress – making it less likely someone will find work again

Question 35

How is the change in the pattern of jobs a consequence of unemployment?

Answer 35

• New jobs in the recovery stage are often different from lost ones
• Structural unemployment – i.e. occupational immobility – makes it harder to get people into new
  jobs

Question 36

What are policies to reduce unemployment?

Answer 36

• Macro Stimulus Policies (+ possible positive multiplier effects)
• Cutting the cost of employing extra workers
• Competitiveness Policies
• Reducing occupational immobility
• Improving geographical mobility
• Stimulate stronger work incentives

Question 37

What are macro stimulus policies to reduce unemployment?

Answer 37

• Low interest rates + improving credit supply to businesses
• Depreciation in the exchange rate (to help exporters)
• Infrastructure investment projects (fiscal policy)

Question 38

What are policies that involve costs being cut of employing extra workers to reduce unemployment?

Answer 38

• Reductions in the rate of national insurance contributions
• Financial support for apprenticeships / paid internships
• Extra funding for regional policy – special economic zones

Question 39

What are competitiveness policies to reduce unemployment?

Answer 39

• Reductions in corporation tax (to increase investment)
• Tax incentives for research / innovation spending
• Enterprise policies to encourage new business start-ups

Question 40

What are policies of reducing occupational mobility to reduce unemployment?

Answer 40

o Better funding for more effective work training
o Teaching new skills e.g. Coding for gaming, languages
o An expansion of apprenticeship / internship programmes

Question 41

What are policies to improve geographical mobility in order to reduce unemployment?

Answer 41

o Rise in house-building to keep property prices lower and encourage more affordable housing rents
o Active regional policy to improve transport infrastructure

Question 42

How can stimulating stronger work incentives reduce unemployment?

Answer 42

o Higher minimum wage
o Increased tax-free allowance
o Welfare reforms to help reduce the risk of the poverty trap

Question 43

What are the economic benefits of falling unemployment?

Answer 43

1. Increased employment – which then increases real GDP and helps to lift living standards and demand
2. More people in work – creates extra tax revenues for the government either used to lower the budget deficit
   / or increase spending (G)

Question 44

What are the potential disadvantages of falling unemployment?

Answer 44

1. Extra spending from expanding labour market might worsen the current account
2. Risk of an acceleration in demand-pull and cost-push inflationary pressures if unemployment falls rapidly
3. Fewer spare labour will mean a rise in unfilled vacancies; labour shortages might put off some inward
   investment

Question 45

Explain how net positive immigration can increase the labour supply in an economy

Answer 45

In a ‘free’ labour market, this would likely
cause wages to fall. However, an increase in the population size also increases demand for goods / services, which in
turn raises demand for labour. This can create new jobs and keep wages stable. If migrant workers are ‘substitutes’ for
native workers, then this increases competition for jobs. This might cause wages to fall, and is more likely in low-skilled
jobs. However, if migrant workers are ‘complements’ for native workers, then there may be wage increases, especially
in medium to high-skill jobs.