patterns and trends in (un)employment

Employment & Unemployment – Cambridge IGCSE / A‑Level (9708)

1. Key Definitions

• Employment: Persons aged 16 + who performed any work for pay or profit during the reference week, or who were temporarily absent from work (e.g., sick, on holiday).
• Unemployment: Persons aged 16 + who are without work, have actively looked for work in the last four weeks, and are available to start within the next two weeks.
• Labour Force (LF): Employed + Unemployed.
• Economic Inactivity: Persons not in the labour force (students, retirees, homemakers, long‑term sick, discouraged workers, etc.).
• Working‑age population (P): All persons aged 16 + (including the economically inactive).

2. Measuring Unemployment

Unemployment rate (U‑rate) – the principal indicator used in the Cambridge syllabus:

$$\text{Unemployment Rate} \;=\; \frac{U}{L}\times 100$$

where U = number of unemployed and L = labour force.

2.1 Other Labour‑Market Indicators

Indicator	Formula / Description	Typical Use
Employment Rate	$$\frac{E}{P}\times100$$ where E = employed	Shows the proportion of the working‑age population that is in work.
Labour‑Force Participation Rate (LFPR)	$$\frac{L}{P}\times100$$	Indicates the share of the population either working or seeking work.
Under‑employment	Number (or % of) part‑time workers who would like full‑time work.	Reveals hidden slack in the labour market.
Job‑Vacancy Rate	$$\frac{V}{V+E}\times100$$ where V = vacancies	Measures demand for labour; used together with the unemployment rate in the Beveridge Curve.

2.2 Measurement Issues & Hidden Unemployment

• Discouraged workers – people who have stopped looking for a job are counted as economically inactive, not unemployed.
• Part‑time/under‑employment – workers who are employed but would like more hours are not captured by the U‑rate.
• Informal & hidden economy – unregistered work (e.g., cash‑in‑hand) may be omitted from official surveys.
• Seasonal adjustment – raw figures can be misleading in sectors with strong seasonal patterns.

2.3 Macro‑economic Consequences of Unemployment

• Output gap: High unemployment usually means actual GDP is below potential GDP, creating a negative output gap.
• Wage‑price dynamics: Persistent unemployment can keep wage‑growth low, reducing inflationary pressure (the Phillips‑curve relationship).
• Fiscal impact: Higher unemployment raises government spending on benefits while reducing tax receipts.
• Social costs: Long‑run unemployment can increase inequality, reduce skills (human‑capital loss), and raise health‑related expenditures.

3. Types of Unemployment (Cambridge Syllabus)

1. Cyclical (Demand‑deficient) Unemployment: Arises when aggregate demand (AD) falls below the economy’s productive capacity. Varies with the business cycle.
2. Structural Unemployment: Result of a mismatch between workers’ skills (or locations) and the skills demanded by employers. Often long‑lasting.
3. Frictional Unemployment: Short‑term unemployment while workers search for jobs that better match their preferences or relocate.
4. Seasonal Unemployment: Occurs in industries with regular seasonal patterns (e.g., agriculture, tourism, construction).
5. Technological Unemployment: Caused by automation, AI or new production techniques that render certain skills redundant.

4. Labour‑Market Equilibrium, Natural Rate & Hysteresis

4.1 Labour‑Market Diagram (Wage‑Rate vs. Labour)

• Demand for labour is derived from the marginal revenue product (MRP) of labour:
  $$\text{MRP}_L \;=\; \Delta \text{TR}/\Delta L$$ where TR = total revenue.
• Supply of labour reflects workers’ willingness to work at different wage rates (upward‑sloping).
• In a perfectly competitive labour market equilibrium occurs where MRP = Wage = Supply. The corresponding employment level is E\* and the equilibrium wage is W\*.
• Imperfect markets (e.g., minimum wage, union bargaining power, monopsony) shift either the supply curve (upward) or the demand curve (downward), creating a new equilibrium with either higher wages & lower employment (minimum wage/union) or lower wages & lower employment (monopsony).

4.2 Natural Rate of Unemployment (NRU)

• Defined as the unemployment rate when the labour market is in long‑run equilibrium (no cyclical unemployment).
• NRU = Structural + Frictional unemployment.
• At the NRU the economy operates at potential output and price pressures are stable.

4.3 Hysteresis

• Prolonged periods of high cyclical unemployment can raise the NRU.
• Mechanisms: loss of firm‑specific skills, discouragement (reducing LFPR), and wage‑setting institutions adapting to higher unemployment.

4.4 Labour‑Market Failures

• Minimum wage – a price floor above the equilibrium wage creates unemployment (excess supply of labour).
• Trade‑union power – can push wages above equilibrium, also generating unemployment.
• Monopsony – a single (or few) large employers face an upward‑sloping labour supply; they set wages below competitive level, leading to under‑employment.
• Information asymmetries – imperfect knowledge about job vacancies or worker productivity can increase frictional unemployment.

5. Labour‑Market Forces (A‑Level requirement 8.3)

5.1 Demand for Labour

• Derived from the marginal revenue product (MRP) of labour. Firms hire workers up to the point where MRP = Wage.
• In a perfectly competitive product market, MRP = MPL × MR (where MPL = marginal product of labour, MR = marginal revenue).

5.2 Supply of Labour

• Depends on the reservation wage, demographic factors, and non‑monetary job attributes (location, working conditions).
• In a perfectly competitive labour market the supply curve is upward‑sloping.

5.3 Wage Determination in Different Market Structures

Market Structure	Wage‑Setting Mechanism	Typical Outcome
Perfect competition	Wage = MRP of labour	Efficient allocation; no involuntary unemployment (apart from frictional/structural).
Minimum wage (price floor)	Wage set by law > equilibrium wage	Excess supply of labour → unemployment.
Trade‑union bargaining	Wage negotiated above equilibrium	Higher wages, possible unemployment, but can raise productivity via better conditions.
Monopsony	Single (or few) employer(s) set wage below MRP	Under‑employment; dead‑weight loss.

5.4 Wage Differentials, Transfer Earnings & Economic Rent

• Transfer earnings: The minimum wage a worker could obtain elsewhere; firms must pay at least this to attract labour.
• Economic rent: Any payment to a factor of production above its transfer earnings (e.g., specialist doctors earning far above the next‑best alternative).
• Wage differentials arise from differences in skill, location, risk, and union coverage.

6. Patterns & Trends in the UK (1990‑2024)

Official ONS unemployment rates for selected years, together with the dominant economic event and the predominant type(s) of unemployment.

Year	Unemployment Rate (%)	Key Economic Event	Dominant Unemployment Type(s)
1992	9.2	Early‑1990s recession	Cyclical, rising structural (financial sector)
1997	7.4	Start of the “Great Moderation”	Cyclical falling, frictional
2008	7.9	Global financial crisis	Cyclical spike
2010	8.0	Euro‑zone debt crisis spill‑over	Cyclical, emerging structural (financial services)
2015	5.4	Recovery + austerity measures	Falling cyclical, structural shift to services
2020	4.5	COVID‑19 pandemic onset (initial drop in LFPR)	Frictional + temporary seasonal effects
2022	3.8	Post‑pandemic recovery, labour shortages	Very low cyclical, rising structural/fractional
2024	4.1	Rising inflation, monetary tightening	Early cyclical rise, possible hysteresis

6.1 Interpreting the Trends

• Cyclical patterns are evident around 1992, 2008‑2010 and 2020‑2024, where unemployment rises during downturns and falls during recoveries.
• Structural shifts become clear after 2015, driven by growth in services, digitalisation, and the expansion of zero‑hour contracts.
• Labour‑market tightness after 2021 is shown by falling unemployment alongside a surge in vacancy rates – the Beveridge Curve moves outward, signalling skill mismatches (structural) and higher frictional turnover.
• Evidence of hysteresis would appear if the post‑2024 rise in unemployment persists, pushing the NRU upward.

7. Macro‑Policy Impact on Unemployment

7.1 Demand‑Side Policies

• Expansionary fiscal policy (higher government spending or tax cuts) shifts AD rightward, raising real GDP and reducing cyclical unemployment. Time‑lag: policy decision → AD shift → output change (typically 6‑12 months).
• Expansionary monetary policy (lower interest rates, quantitative easing) reduces borrowing costs, stimulates consumption and investment, also shifting AD rightward.

7.2 Supply‑Side Policies

• Education & training, apprenticeships, and re‑skilling schemes aim to reduce structural unemployment.
• Labour‑market reforms (e.g., flexible working hours, reduced redundancy costs) can lower frictional unemployment.
• Tax incentives for research & development encourage technological upgrading; in the short run they may create technological unemployment, but in the long run raise potential output.

7.3 Active Labour‑Market Policies (ALMPs)

• Job‑search assistance, subsidised employment, wage subsidies and public‑work schemes target frictional unemployment and can absorb workers displaced by structural change.

7.4 Policy Trade‑offs – The Phillips Curve

• In the short run, lower unemployment tends to be associated with higher inflation (upward‑sloping Phillips curve).
• Demand‑side stimulus that pushes unemployment below the NRU can generate inflationary pressure, whereas overly tight labour markets may force wage‑price spirals.
• Supply‑side reforms aim to shift the NRU leftward, allowing lower unemployment without triggering inflation.

7.5 Diagrammatic Illustrations

• AD/AS diagram – expansionary fiscal or monetary policy shifts AD from AD₁ to AD₂, moving the economy from a recessionary equilibrium (Y₁, P₁) to a higher output (Y₂) and lower cyclical unemployment.
• Beveridge Curve – inverse relationship between unemployment and vacancy rates. An outward shift signals rising structural/fractional mismatches; movement along the curve reflects cyclical fluctuations.
• Labour‑market diagram – shows equilibrium wage and employment under perfect competition and the effects of a minimum wage, union bargaining, or monopsony on wages and employment.

8. Evaluation of Policy Tools (AO3)

Policy	Strengths (Why it works)	Limitations / Risks	Key Assumptions
Expansionary fiscal stimulus	Direct boost to aggregate demand; can quickly lower cyclical unemployment.	May increase public debt; risk of crowding‑out if economy is near full capacity; time‑lag in parliamentary approval.	Assumes idle resources and a multiplier > 1.
Monetary easing (lower rates / QE)	Reduces borrowing costs, encourages investment and consumption; flexible and can be adjusted quickly.	Limited effectiveness when rates are near zero (liquidity trap); can fuel asset‑price inflation; transmission lag.	Assumes banks pass on lower rates and firms respond with higher investment.
Education & training programmes	Targets the root cause of structural unemployment; improves long‑run productivity.	Long implementation horizon; may not match future skill needs; requires substantial public funding.	Assumes participants acquire relevant skills and employers have suitable vacancies.
Wage subsidies / subsidised employment	Encourages firms to hire marginal workers; can reduce frictional unemployment quickly.	Potentially costly; risk of creating dependency; may distort labour‑market signals.	Assumes firms would not hire without the subsidy and that the subsidy does not crowd out private hiring.
Job‑search assistance (ALMP)	Improves matching efficiency; reduces duration of unemployment.	Effectiveness varies with service quality; may be under‑utilised by discouraged workers.	Assumes job‑seekers are willing and able to act on advice.
Minimum‑wage increase	Raises living standards for low‑paid workers; can stimulate consumption.	May create unemployment if set above equilibrium; can increase informal employment.	Assumes labour‑market is competitive and firms can absorb higher labour costs.
Trade‑union bargaining reforms	Can improve wages and conditions, reducing turnover.	Risk of wage‑price spirals; may reduce firm competitiveness.	Assumes unions have sufficient bargaining power and that higher wages do not lead to layoffs.

9. Summary Points (AO1)

1. Unemployment is measured as a rate; the labour force is the denominator.
2. Five recognised types: cyclical, structural, frictional, seasonal and technological.
3. Measurement problems (discouraged workers, under‑employment, informal work) can hide the true level of labour slack.
4. The natural rate of unemployment = structural + frictional; it is the long‑run equilibrium rate.
5. Prolonged high cyclical unemployment can cause hysteresis, raising the NRU.
6. Labour‑market equilibrium is where the marginal revenue product of labour equals the wage; imperfections (minimum wage, unions, monopsony) shift the equilibrium.
7. Historical UK data (1990‑2024) illustrate clear cyclical spikes, a long‑run structural decline, and recent labour‑market tightness.
8. Complementary indicators (employment rate, LFPR, vacancy rate, under‑employment) give a fuller picture of labour‑market health.
9. Demand‑side policies shift AD and reduce cyclical unemployment; supply‑side policies and ALMPs address structural and frictional unemployment; each tool has strengths, limitations and possible trade‑offs with inflation.