Formula for the unemployment rate

Government and the Macro‑economy

Employment and Unemployment (Topic 4.6 – Cambridge IGCSE 0455)

1. Key definitions (AO1)

• Employed: Persons of working age who did any work for pay or profit during the reference week, or who were temporarily absent from such work (e.g., on holiday or sick leave).
• Unemployed: Persons of working age who were not employed during the reference week, were available for work, and had taken specific steps to look for a job (e.g., contacting employers, registering with an employment agency).
• Labour force (LF): The sum of the employed and the unemployed. People who are not seeking work – such as full‑time students, retirees, or discouraged workers – are excluded.
• Full‑employment: The level of employment at which the only unemployment present is frictional, structural and seasonal. It is the “natural” rate of unemployment when the economy is operating at its potential output.

2. Measuring unemployment (AO1)

The labour‑force survey (LFS) is the official source of data used in most IGCSE examinations. It provides the numbers of employed and unemployed people needed to calculate the unemployment rate.

2.1 Unemployment‑rate formula

\[ \text{Unemployment rate (U)} \;=\; \frac{U_n}{\text{LF}} \times 100\% \]

• \(U_n\) = number of unemployed persons.
• \(\text{LF}\) = labour force = employed + unemployed.
• The result is expressed as a percentage and, unless otherwise stated, is rounded to one decimal place (as required by the syllabus).

2.2 Step‑by‑step calculation

1. Obtain the number of unemployed (\(U_n\)) from the LFS.
2. Obtain the number of employed (\(E\)) from the same source.
3. Calculate the labour force: \(\text{LF}=U_n+E\).
4. Insert the values into the formula \(U = \dfrac{U_n}{\text{LF}} \times 100\%\).
5. Round the final answer to one decimal place (or as the exam question requires).

2.3 Example calculation

Data for a hypothetical country (reference week):

1. Labour force: \(\text{LF}=12,500,000+1,250,000=13,750,000\).
2. Unemployment rate: \[ U = \frac{1,250,000}{13,750,000}\times100\% = 9.09\% \approx 9.1\% \] (rounded to one decimal place).

3. Types of unemployment (AO2)

4. Consequences of unemployment (AO2)

• Individuals: loss of income, reduced standard of living, psychological stress, loss of skills (human‑capital depreciation).
• Firms: lower consumer demand, reduced sales, possible pressure to cut wages or increase productivity.
• Government: lower tax receipts, higher spending on unemployment benefits and other welfare programmes, increased budget deficits.
• Economy: under‑utilisation of labour resources, potential for inflationary pressure to fall (the “non‑accelerating inflation rate of unemployment” concept can be mentioned as a link to wage pressure).

5. Policies to reduce unemployment (AO2)

Cambridge expects students to name at least two demand‑side and two supply‑side measures and explain how they affect the unemployment rate.

• Demand‑side (fiscal/monetary)
  • Expansionary fiscal policy – increased government spending on public‑works or infrastructure creates jobs directly and raises aggregate demand, reducing cyclical unemployment.
  • Monetary stimulus – lower interest rates encourage investment and consumer spending, boosting output and employment.
• Supply‑side
  • Training and education programmes – improve workers’ skills, helping to close structural mismatches.
  • Changes to the national minimum wage – a modest increase can raise income for low‑paid workers without causing large job losses; a very high increase may discourage hiring.
  • Incentives for firms to create jobs (e.g., tax credits for hiring the long‑term unemployed).

6. Limitations of the unemployment rate (AO2)

• Discouraged workers – people who have stopped looking for work are excluded, so the rate may under‑state true labour‑market slack.
• Under‑employment – part‑time workers who would like more hours are counted as employed.
• Regional and demographic differences – a single national figure masks variations between regions, age groups, or genders.
• Informal economy – workers in unregistered or cash‑only jobs are often missed by the survey.

7. Interpretation of the unemployment rate (AO2)

• High unemployment → under‑utilisation of labour, possible recessionary pressure, lower tax revenue, higher welfare costs.
• Low unemployment → tight labour market, upward pressure on wages, possible inflationary pressure if demand exceeds supply.
• Policymakers monitor month‑to‑month and year‑to‑year changes to decide whether to adjust fiscal or monetary policy, or to introduce targeted labour‑market programmes.