Cambridge Syllabus Notes

Employment, Unemployment and the Labour Market

These notes satisfy the Cambridge IGCSE/A‑Level Economics (9708) requirements for the voluntary and involuntary unemployment sub‑topic (Syllabus 4.5) and show how the material links to the wider macro‑economic syllabus.

1. Key Concepts, Definitions and Measurement

Term	Cambridge definition
Unemployment (ILO)	People who are without work, are available for work and have actively looked for a job in the last four weeks.
Voluntary unemployment	Unemployment that results from an individual’s choice not to work at the prevailing real wage (e.g. to enjoy leisure, study, care for family, or wait for a better job match).
Involuntary unemployment	Unemployment that occurs when a person is willing to work at the current real wage but cannot find a job because labour demand is insufficient or wages are kept above the market‑clearing level.
Labour‑force participation rate (LFPR)	\[ \text{LFPR}= \frac{L}{P}\times 100\% \] where \(L\) = labour force (employed + unemployed) and \(P\) = working‑age population.
Unemployment rate (UR)	\[ \text{UR}= \frac{U}{L}\times 100\% \] where \(U\) = number of unemployed persons.
Hidden unemployment	Discouraged workers who have stopped looking for work; they are counted as “not in the labour force” but are relevant for policy analysis.
Under‑employment	Workers employed part‑time or in jobs that do not use their skills; often a symptom of structural or involuntary unemployment.

2. Text‑book Types of Unemployment

Type	One‑sentence definition (Cambridge)
Frictional	Short‑term unemployment that occurs while workers search for a job that better matches their skills or preferences.
Structural	Long‑term unemployment caused by a mismatch between the skills (or location) of workers and the requirements of available jobs.
Cyclical (or demand‑deficient)	Unemployment that rises when aggregate demand falls short of potential output, leading firms to cut labour.
Seasonal	Unemployment that results from regular, predictable fluctuations in demand for labour (e.g., agriculture, tourism).
Technological (or “technological‑change”)	Unemployment generated when new technologies render certain skills or occupations obsolete.

2.1 Causes – Consequences Table

Unemployment type	Typical cause(s)	Key macro‑policy response
Frictional	Job‑search time, information gaps.	Improved job‑matching services, reduced hiring costs (supply‑side).
Structural	Skill mismatches, geographic immobility, sectoral shifts.	Vocational training, mobility subsidies, education reform (supply‑side).
Cyclical	Insufficient aggregate demand.	Fiscal stimulus, monetary easing, public‑works (demand‑side).
Seasonal	Regular seasonal fluctuations in certain industries.	Seasonal wage insurance, off‑season training programmes.
Technological	Automation, new production processes.	Retraining, support for entrepreneurship, R&D incentives.

3. Labour‑Market Framework

3.1 The Wage‑Setting (WS) – Price‑Setting (PS) Model

Price‑setting curve (PS): Real wage that firms are willing to pay for a given level of employment, derived from the marginal revenue product of labour (MRP).
Equation: \(w = \frac{MRP_N}{N} = \frac{P \times MPL}{N}\) (simplified as \(w = MPL\) when output price \(P\) is constant).
Wage‑setting curve (WS): Real wage workers demand for a given employment level, reflecting the trade‑off between work and leisure and the level of unemployment benefits.
Intersection (E) = equilibrium real wage \(w^{*}\) and employment \(N^{*}\).
If the actual real wage is set **above** \(w^{*}\) (e.g., a minimum‑wage floor), the WS curve lies to the left of PS → **involuntary unemployment** (excess supply of labour).
If workers voluntarily withdraw from the labour market because the real wage is **below** their reservation wage, the labour‑supply line shifts left → **voluntary unemployment**.

Diagram to draw in class:

Horizontal axis = Real employment (N); vertical axis = Real wage (w).
Draw an upward‑sloping WS curve and a downward‑sloping PS curve.
Mark the equilibrium point (E) where WS = PS.
Show a horizontal line above the equilibrium wage (minimum wage). The horizontal distance between WS and PS at that wage level represents involuntary unemployment.
Show a lower wage line where workers opt out of the labour force; the gap between the labour‑force line and WS represents voluntary unemployment.

3.2 Labour‑Demand Side: Marginal Revenue Product (MRP) Model

Marginal product of labour (MPL): Additional output produced by one more unit of labour, holding other inputs constant.
Marginal revenue product of labour (MRP_N): Value of the additional output, i.e. \(MRP_N = P \times MPL\) where \(P\) is the price of the output.
Firms hire labour up to the point where \(MRP_N = w\) (the real wage). This condition generates the downward‑sloping PS curve.

3.3 Labour‑Supply Determinants (WS Curve Logic)

Real wage level – higher wages increase labour supply (upward‑sloping WS).
Unemployment‑benefit rate – higher benefits raise the reservation wage, shifting WS leftward.
Tax‑withdrawal rates – steeper withdrawal reduces the net wage, shifting WS leftward.
Demographics (age structure, gender participation) – affect the size of the labour‑force.
Preferences for leisure, education, or caring responsibilities – influence the slope of WS.

3.4 Classical vs. Keynesian Views

Aspect	Classical (full‑employment) model	Keynesian (involuntary unemployment) model
Assumption about wages	Wages are perfectly flexible; the labour market always clears.	Wages are sticky downwards; real wages can stay above the market‑clearing level.
Source of unemployment	Only voluntary (frictional, structural, seasonal).	Both voluntary and involuntary (cyclical/demand‑deficient).
Policy implication	Minimal state intervention; focus on supply‑side reforms.	Active demand‑side policies (fiscal/monetary) to boost AD, plus supply‑side measures.

4. Relationship to Other Macro Variables

4.1 Unemployment and Inflation – The Phillips Curve

Short‑run Phillips curve: Inverse relationship between the unemployment rate (U) and the rate of inflation (π).
Sketch*: vertical axis = Inflation, horizontal axis = Unemployment; downward‑sloping curve.
Expectations‑augmented Phillips curve: \(\pi = \pi^{e} - \beta (U - U^{*})\) where \(\pi^{e}\) = expected inflation, \(\beta > 0\), and \(U^{*}\) = natural rate of unemployment (NAIRU).
When unemployment falls below the natural rate, inflation tends to rise; when it is above, inflation pressure eases.

4.2 Natural Rate of Unemployment / NAIRU

Defined as the level of unemployment consistent with stable inflation – it includes frictional and structural unemployment but not cyclical (involuntary) unemployment.
Useful for evaluating whether policy is tackling “real” (voluntary) unemployment or merely moving the economy along the short‑run Phillips curve.

5. Causes and Consequences of Voluntary & Involuntary Unemployment

Unemployment type	Primary cause(s)	Typical macro‑policy response
Voluntary	Low real wage relative to reservation wage; high benefit withdrawal rates; preference for leisure or non‑market activities.	Incentive measures – lower benefit withdrawal, tax credits, child‑care subsidies; wage‑flexibility reforms.
Involuntary (cyclical)	Insufficient aggregate demand; negative expectations.	Demand‑side stimulus – expansionary fiscal policy, monetary easing, public‑works.
Structural	Skill mismatches, geographic immobility, sectoral shifts.	Supply‑side reforms – training programmes, mobility subsidies, labour‑market deregulation.
Institutional (e.g., minimum wage, strong unions)	Wage‑rigidity that keeps real wages above equilibrium.	Reform of wage‑setting institutions; review of minimum‑wage level.

6. Policy Responses – Matching Policies to Unemployment Types

6.1 Demand‑Side Policies (targeting involuntary/cyclical unemployment)

Fiscal stimulus: Increase government spending or cut taxes to shift AD rightward.
Monetary easing: Lower policy interest rates, quantitative easing to boost investment and consumption.
Public‑works programmes: Direct creation of jobs, especially in infrastructure, to reduce idle labour.

6.2 Supply‑Side Policies (addressing structural and institutional unemployment)

Vocational training, apprenticeships and lifelong‑learning schemes.
Mobility subsidies – relocation grants, improved transport links.
Labour‑market reforms – flexible wages, reduced statutory redundancy payments, review of employment‑protection legislation.
Entrepreneurship support – start‑up grants, tax relief for SMEs.

6.3 Incentive Measures for the Voluntarily Unemployed

Reduced benefit‑withdrawal rates (e.g., 30 % taper rather than 50 %).
Earned Income Tax Credits or similar low‑income work subsidies.
Child‑care vouchers/subsidies to remove non‑financial barriers to work.

7. Linking the Topic to the Full Cambridge Syllabus

Syllabus Block (AS)	Key Sub‑topics	Link to Unemployment Notes
1. Basic Economic Ideas & Resource Allocation	Scarcity, opportunity cost, factors of production, PPC.	Labour is a factor of production; opportunity cost of leisure vs. work explains voluntary unemployment.
2. The Price System & Microeconomics	Demand‑supply, equilibrium, consumer/producer surplus, elasticities.	Labour‑market diagram is a specialised demand‑supply model; wage elasticity influences the WS curve.
3. Government Intervention in Micro‑Markets	Taxes, subsidies, price controls, merit‑demerit goods.	Minimum‑wage (price floor) creates involuntary unemployment; tax credits affect voluntary unemployment.
4. The Macro‑Economy	National income, circular flow, AD/AS, growth, unemployment, inflation.	UR and LFPR formulas, WS‑PS model, AD shifts, Phillips curve link unemployment to inflation.
5. Government Macro‑Intervention	Fiscal, monetary, supply‑side policies.	Section 6 details the appropriate policy mix for each unemployment type.
6. International Economic Issues	Trade theory, protectionism, balance of payments, exchange‑rate regimes.	Open‑economy AD shifts (e.g., export‑driven growth) can reduce cyclical unemployment.
7‑11. A‑Level Extensions (optional)	Utility, market failure, labour‑market theory, multiplier, development.	Involuntary unemployment is a classic market‑failure; the fiscal multiplier explains the impact of public‑works programmes.

8. Summary

Unemployment is measured by the unemployment rate; the labour‑force participation rate shows how many of the working‑age population are active.
Five textbook types (frictional, structural, cyclical, seasonal, technological) are all part of the Cambridge syllabus.
Voluntary unemployment stems from personal choice or incentive structures; involuntary unemployment arises when real wages are above the market‑clearing level or when aggregate demand is insufficient.
The WS–PS diagram, together with the MRP model, provides a clear visual and analytical distinction between voluntary and involuntary unemployment.
Unemployment interacts with inflation via the Phillips curve; the natural rate of unemployment (NAIRU) separates “real” structural unemployment from cyclical fluctuations.
Policy responses are matched to the underlying cause: demand‑side tools for cyclical/involuntary unemployment, supply‑side reforms for structural/institutional problems, and incentive measures for voluntarily unemployed.
Understanding these concepts links micro‑economic labour‑market theory with macro‑economic policy and fulfills all Cambridge AS/A‑Level syllabus requirements.

voluntary and involuntary unemployment