The measurement of unemployment, the types and causes of unemployment, the consequences of unemployment, and the significance of changes in employment and the labour force.

What this dot point is asking

AQA wants you to explain how unemployment is measured, distinguish the types and causes of unemployment, assess its consequences, and explain the significance of changes in employment and the labour force. Matching the right policy to the right cause is the key evaluation skill.

Measuring unemployment

The labour force is the employed plus the unemployed. The economically inactive (students, carers, the retired and discouraged workers) are not in the labour force and are not counted as unemployed, which is why a falling unemployment rate can hide a rising inactivity rate. The two measures usually differ because the claimant count omits those seeking work who do not claim benefits, while the Labour Force Survey captures them.

Types and causes

The cause matters enormously for policy: cyclical unemployment responds to demand-side stimulus, but structural and frictional unemployment need supply-side measures such as retraining and better job information, because boosting demand alone cannot match unemployed coal miners to vacancies in software.

Consequences of unemployment

• For individuals. Lost income, falling living standards, the erosion of skills (hysteresis, where long-term unemployment becomes self-perpetuating), and health and social problems.
• For firms. Lower consumer demand reduces sales, though a larger pool of available labour can hold down wage costs.
• For the government. Lower income-tax and VAT revenue and higher benefit spending worsen the budget balance.
• For the economy. Lost output (a negative output gap) and a waste of scarce resources, equivalent to producing inside the production possibility frontier.

Changes in employment and the labour force

Rising employment and participation raise potential output and tax revenue, while migration and demographic change alter the size and skills of the labour force. The employment rate and inactivity rate can move independently of the unemployment rate, so all three indicators matter. A rise in inactivity after the pandemic, for example, can keep the unemployment rate low while reducing the effective labour supply and so capping potential output.