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How is unemployment measured, what are its types and causes, and what are its costs?

2.1 Employment and unemployment: the measurement of unemployment (the Labour Force Survey and the claimant count), the types and causes of unemployment, and the economic costs of unemployment.

An OCR H460 answer to employment and unemployment, covering how unemployment is measured through the Labour Force Survey and the claimant count, the types and causes of unemployment (frictional, structural, cyclical, seasonal and real-wage), and the economic costs of unemployment.

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  1. What this dot point is asking
  2. Measuring unemployment
  3. Types and causes of unemployment
  4. The economic costs of unemployment
  5. Examples in context
  6. Try this

What this dot point is asking

OCR wants you to explain how unemployment is measured (the Labour Force Survey and the claimant count), to distinguish the types and causes of unemployment, and to explain its economic costs to individuals, firms, the government and society.

Measuring unemployment

The UK uses two measures:

  • The Labour Force Survey (LFS) uses the International Labour Organization (ILO) definition (out of work, available and seeking in the past four weeks). It is a large sample survey, internationally comparable, and the headline measure.
  • The claimant count records those claiming unemployment-related benefits. It is timely and cheap but narrower, because not all unemployed people claim, and eligibility rules change.

Both can understate true slack by excluding the underemployed (part-time workers wanting full-time hours) and discouraged workers who have given up looking and are counted as inactive.

Types and causes of unemployment

The cause determines the cure: cyclical unemployment responds to demand-side stimulus, while structural unemployment needs supply-side policies (retraining, relocation support) and time.

The economic costs of unemployment

  • To the unemployed. Lost income and living standards, deteriorating skills (hysteresis), and harm to health and well-being.
  • To firms. Lower consumer spending reduces demand for their products; but a pool of unemployed labour can dampen wage pressure.
  • To the government. Lower income-tax and VAT receipts and higher spending on unemployment-related benefits, worsening the budget balance.
  • To society. Lost output: the economy produces inside its PPF, creating a negative output gap, and prolonged unemployment can raise crime and social costs.

Examples in context

  • The 1980s deindustrialisation. The decline of coal, steel and shipbuilding caused persistent structural unemployment in affected regions, illustrating skills and geographical mismatch.
  • The COVID-19 furlough scheme. Designed to prevent cyclical unemployment from a demand collapse by keeping workers attached to firms.
  • Discouraged workers. In weak labour markets, some people stop searching and become inactive, flattering the headline unemployment rate.

Try this

Q1. Distinguish between frictional and structural unemployment. [4 marks]

  • Cue. Frictional: short-term, between jobs; structural: long-term mismatch of skills or location as industries decline.

Q2. Explain one cost of unemployment to the government. [3 marks]

  • Cue. Lower tax revenue and higher benefit spending worsen the budget balance.

Exam-style practice questions

Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

OCR H460/02 20214 marksAn economy has a labour force of 32 million, of whom 1.6 million are unemployed. Of those in work, 4 million are part-time. Calculate the unemployment rate, and explain why it may understate the degree of labour-market slack.
Show worked answer →

A short calculate question. The unemployment rate is the unemployed as a percentage of the labour force.

1.6m32m×100=5%\frac{1.6\text{m}}{32\text{m}} \times 100 = 5\%.

It may understate slack because it excludes the underemployed: the 4 million part-time workers may want more hours, and discouraged workers who have stopped looking are counted as economically inactive, not unemployed, so they fall out of the labour force entirely.

Markers reward the 5 per cent calculation and at least one reason (underemployment or discouraged workers) why the headline rate understates true slack.

OCR H460/02 202312 marksAssess the view that structural unemployment is the most difficult type of unemployment for a government to reduce.
Show worked answer →

A levels-of-response question. Knowledge and application: define structural unemployment (a mismatch between workers' skills or location and available jobs, as industries decline) and contrast with frictional, cyclical and seasonal unemployment.

Analysis: explain why structural unemployment is persistent (it needs retraining, geographical mobility and time) whereas cyclical unemployment can be tackled by reflating demand.

Evaluation: weigh the difficulty. Supply-side policies (training, relocation support) can reduce structural unemployment but are slow and costly; cyclical unemployment, though demand-responsive, can be deep in a severe recession. Conclude with a supported judgement, for example that structural unemployment is the hardest to cure quickly because it requires long-term supply-side change, but severity matters.

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