Understanding the labour market is essential for analysing how government policies affect the macro‑economy. The three core concepts are employment, unemployment and full employment.
Employment: The state of being engaged in paid work or self‑employment during a specified period. It includes both full‑time and part‑time work.
Unemployment: The condition of being without work, being available for work, and having taken active steps to seek employment within a given reference period.
Full employment: The level of employment at which the economy is operating at its potential output, with only frictional and structural unemployment present. It does not mean zero unemployment.
Key points to remember:
The labour force consists of the employed plus the unemployed.
The unemployment rate is calculated as:
\$\text{Unemployment Rate} = \frac{\text{Number of unemployed}}{\text{Labour force}} \times 100\$
Full employment is associated with the natural rate of unemployment, typically estimated at 4‑6 % of the labour force for many economies.
Term
Definition
Typical measurement
Employment
People who are working for pay or profit during a given period.
Number of persons employed (e.g., in thousands)
Unemployment
People who are without work, are available for work and have taken active steps to find a job.
Unemployment rate = \$\frac{\text{Number of unemployed}}{\text{Labour force}} \times 100\$
Full employment
The level of employment at which the economy operates at its potential output, with only frictional and structural unemployment.
Natural rate of unemployment (often 4‑6 % of the labour force)
Suggested diagram: Labour‑market diagram showing equilibrium at full employment, with the horizontal axis representing the quantity of labour and the vertical axis representing the wage rate.