How unemployment is measured (labour force survey)

Government and the Macro‑economy – Employment and Unemployment (Cambridge IGCSE/A‑Level 0455 §4.6)

Learning Objective

Explain how unemployment is measured using the Labour Force Survey (LFS), analyse the causes and consequences of unemployment, and evaluate the range of policy responses. This covers all assessment objectives (AO1‑AO3) required for the syllabus.

Key Definitions (AO1)

• Employment: Persons who carried out any work for pay or profit during the reference week, or who were temporarily absent (e.g., on holiday or sick) but have a job to return to.
• Unemployment: Persons who are not working, are available for work, and have actively looked for a job in the past four weeks.
• Full‑employment: The economy operating at its natural rate of unemployment – i.e. only frictional, structural and seasonal unemployment remain; cyclical unemployment is zero.
• Labour‑force participation rate (LFPR) (activity rate): The proportion of the working‑age population that is either employed or unemployed.
• Not in the labour force: People who are neither employed nor unemployed (e.g., full‑time students, retirees, homemakers, discouraged workers).

Labour Force Survey (LFS)

The LFS is the official household survey used by national statistical offices (e.g., the UK Office for National Statistics) to produce the key labour‑market statistics.

1. Sample selection – a statistically representative sample of households is drawn.
2. Interview – every member aged 16 (or 15) + is asked about his/her activity during a reference week.
3. Classification – respondents are placed into one of three categories: employed, unemployed or not in the labour force.
4. Aggregation – the numbers in each category are summed and weighted to give national totals.

Labour‑Market Indicators (AO1)

Worked Example

Suppose the LFS for Country X (figures in thousands) reports:

Working‑age population \(P = 12,500 + 1,250 + 6,250 = 20,000\) (000).

• Labour Force: \(LF = 12,500 + 1,250 = 13,750\) (000)
• Unemployment Rate: \(UR = \dfrac{1,250}{13,750}\times100 = 9.1\%\)
• Employment Rate: \(ER = \dfrac{12,500}{13,750}\times100 = 90.9\%\)
• Labour‑Force Participation Rate: \(LFPR = \dfrac{13,750}{20,000}\times100 = 68.8\%\)

Types and Causes of Unemployment (AO2)

• Frictional unemployment – short‑term job search while moving between jobs or entering the labour market for the first time.
  Example: A recent graduate looking for a first job.
• Structural unemployment – mismatch between workers’ skills and the skills demanded by employers, often due to technological change or relocation of industries.
  Example: Coal‑miners displaced by renewable‑energy projects.
• Cyclical (demand‑deficient) unemployment – caused by a fall in aggregate demand; rises in recessions and falls in expansions.
  Example: Workers laid off during an economic downturn.
• Seasonal unemployment – arises when demand for labour varies at different times of the year.
  Example: Agricultural workers who are idle outside the harvest season.

Consequences of Unemployment (AO2)

• Individuals – loss of income, reduced living standards, psychological stress, and skill deterioration (hysteresis).
• Firms – lower sales, reduced profits, and possible under‑utilisation of capital.
• Government – higher welfare and unemployment‑benefit spending, lower tax receipts, and greater pressure on public services.
• Economy – under‑utilised resources, lower real GDP, and a potential long‑run growth drag if structural unemployment persists.

Policy Measures to Reduce Unemployment (AO3)

Policy Trade‑offs – Link to Other Macro‑economic Aims (AO3)

• Expansionary fiscal or monetary policy moves the economy toward full‑employment output but can generate upward pressure on the price level – the classic Phillips‑curve trade‑off.
• Large public‑works programmes cut cyclical unemployment and improve long‑run productive capacity, yet they increase the fiscal deficit and may crowd out private investment.
• Supply‑side reforms (training, deregulation) help lower structural unemployment without immediate inflationary pressure, but the benefits are realised only after a lag.
• Policymakers must balance the three macro‑economic objectives: low unemployment, price stability, and sustainable economic growth.

Labour‑Market Diagram (AO2/AO3)

Limitations of the Labour Force Survey (AO2)

• Undercounting discouraged workers: Those who have stopped looking for work are classed as “not in the labour force”, leading to an underestimate of true unemployment.
• Seasonal variation: Unemployment rates fluctuate with the time of year; figures must be seasonally adjusted for accurate comparison.
• Informal economy: In many developing countries a large share of work is informal and may be missed or mis‑classified.
• Sampling error: Results are subject to a margin of error that depends on sample size and response rates.
• Definition thresholds: The four‑week job‑search requirement and the “available for work” criterion can exclude marginally attached workers.

Summary

The Labour Force Survey provides the official data needed to calculate the unemployment, employment and labour‑force participation rates. Knowing the precise definitions, the four types of unemployment, their consequences and the full range of demand‑side and supply‑side policies – together with the associated trade‑offs and the survey’s limitations – equips students to meet all assessment objectives (AO1‑AO3) for the Cambridge IGCSE/A‑Level Economics syllabus.