What is unemployment, how is it measured, and what causes it?
The meaning and measurement of unemployment, the main types and causes of unemployment, and the consequences of unemployment for individuals, firms and the government.
An OCR J205 answer on unemployment: how it is defined and measured, the main types and causes, and the consequences for individuals, firms and the government.
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What this dot point is asking
OCR wants you to define and measure unemployment, explain the main types and causes, and describe the consequences for individuals, firms and the government. Low unemployment is one of the four macroeconomic objectives.
What unemployment is and how it is measured
For example, if 1.5 million are unemployed out of a labour force of 30 million, the rate is .
Types and causes of unemployment
OCR expects you to know the main types, each with a different cause:
- Frictional unemployment: people temporarily between jobs while searching for the right one. It is short term and exists even in a healthy economy.
- Structural unemployment: workers' skills no longer match the jobs available, often because an industry declines (such as coal mining or manufacturing). It can be long lasting.
- Cyclical (demand-deficient) unemployment: caused by a recession, when low demand means firms cut output and jobs.
- Seasonal unemployment: jobs that disappear at certain times of year, such as seaside or fruit-picking work in winter.
Consequences of unemployment
Unemployment is costly for several groups:
- Individuals: lost income, lower living standards, and over time a loss of skills and confidence (the longer someone is unemployed, the harder it can be to return).
- Firms: lower consumer spending reduces demand for their goods, though a pool of available workers can keep wages down.
- Government: less income tax and VAT is collected, and more is spent on benefits, worsening the budget. There is also pressure to fund retraining and support.
- The economy: output is lost because willing workers are idle, so the economy produces below its potential.
Why some unemployment always exists
Even a healthy economy has some unemployment, mainly frictional (people moving between jobs) and some structural. "Full employment" does not mean zero unemployment; it means unemployment is low and largely voluntary or short term. This is why the objective is low unemployment, not none.
Try this
Q1. Define the unemployment rate. [2 marks]
- Cue. The number of people unemployed as a percentage of the labour force.
Q2. Explain one cost of high unemployment to the government. [3 marks]
- Cue. It collects less income tax and pays out more in benefits, worsening its budget position.
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 J205/02 20194 marksA country has a labour force of 25 million, of whom 2 million are unemployed. Calculate the unemployment rate and explain what it measures.Show worked answer →
A Calculate question. The unemployment rate is the number unemployed as a percentage of the labour force: .
It measures the proportion of people who are willing and able to work and actively seeking a job but cannot find one, out of everyone in the labour force (those working plus those seeking work). Markers reward the correct calculation and a clear statement of what the rate measures.
OCR J205/02 20226 marksExplain the consequences of high unemployment for the government and for the wider economy.Show worked answer →
A 6 mark question on the costs of unemployment.
For the government: it collects less income tax (fewer people earning) and pays more in benefits to the unemployed, worsening its budget position. It may also face pressure to fund retraining.
For the wider economy: output is lost because workers are idle (the economy produces below its potential), demand falls as the unemployed spend less, and long-term unemployment can erode skills, lowering future growth. Markers reward developed consequences for both the government and the economy, ideally including lost output and the benefits/tax effect.
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- The government's main economic objectives (growth, low unemployment, price stability and a fair distribution of income), and why they can conflict.
An OCR J205 answer on the government's main macroeconomic objectives (economic growth, low unemployment, price stability and a fair distribution of income) and the trade-offs between them.
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An OCR J205 answer on economic growth: its meaning, how it is measured with GDP and GDP per capita, the determinants of growth, and the stages of the economic cycle.
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An OCR J205 answer on how the labour market works: the demand for and supply of labour, how they set wages, and why some occupations pay more than others.
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An OCR J205 answer on inflation: how it is measured with a price index, the difference between demand-pull and cost-push inflation, and the effects of inflation on the economy.
- What fiscal policy is, how changes in government spending and taxation affect growth, employment and prices, and the costs and benefits of using it.
An OCR J205 answer on fiscal policy: how government spending and taxation are used to pursue economic objectives, their effect on growth, employment and inflation, and the trade-offs involved.
Sources & how we know this
- OCR GCSE (9-1) Economics J205 specification — OCR (2017)