The types, causes, costs and measurement of unemployment, and demand-side and supply-side policies to reduce it.

What this dot point is asking

WJEC wants you to explain how unemployment is measured, the types and causes of unemployment, its economic and social costs, and the demand-side and supply-side policies that can reduce it.

The answer

Measuring unemployment

The Labour Force Survey gives the unemployment rate as the share of the economically active population (those in work plus those seeking work) who are unemployed. The two measures can differ because not all the unemployed claim benefits and the rules for claiming change over time. Both may understate the true picture by missing hidden unemployment (discouraged workers who have stopped looking) and underemployment (people in part-time or low-hour work who want more). Knowing what each measure captures is essential for the evaluation marks.

Types and causes of unemployment

The cause determines the cure. Cyclical unemployment rises and falls with the trade cycle and is a demand-side problem. Structural unemployment is the legacy of economic change, the decline of coal, steel and manufacturing being classic examples, and reflects immobility of labour. Frictional unemployment is largely unavoidable and even healthy (it reflects a flexible labour market), and together with structural unemployment it makes up the natural rate. Real-wage unemployment can arise from minimum wages or union power set above equilibrium. Identifying the type is the first step in any policy answer.

Costs and policies

Policies must match the cause. Demand-side policies (expansionary fiscal and monetary policy) raise aggregate demand and so the demand for labour, reducing cyclical unemployment, but they risk inflation near full capacity and do little for structural unemployment. Supply-side policies tackle structural and frictional unemployment: education and training to update skills, measures to improve geographical and occupational mobility (housing, relocation help, retraining), benefit reform to strengthen work incentives, and regional policy to bring jobs to depressed areas. Supply-side policy can lower the natural rate of unemployment but acts slowly and may raise inequality. The exam reward is matching the policy to the type of unemployment.

Examples in context

Example 1. Deindustrialisation and structural unemployment in Wales. The decline of coal, steel and heavy manufacturing left areas such as the south Wales valleys with persistent structural unemployment: workers with industry-specific skills, in fixed locations, could not easily move to new jobs. The episode is the classic UK illustration of structural unemployment from occupational and geographical immobility, and of why retraining and regional policy, not demand management, are the appropriate response.

Example 2. Furlough and cyclical unemployment in the pandemic. During the pandemic, the UK furlough scheme paid wages to keep workers attached to firms, deliberately preventing a surge in cyclical unemployment as demand collapsed. It illustrates a demand-side, jobs-focused response to a sudden fall in aggregate demand, designed to avoid the long-term scarring (lost skills, hysteresis) that cyclical unemployment can cause, and the debate over its cost and design is rich material for evaluation.

Try this

Q1. Name two types of unemployment. [2 marks]

• Cue. Any two of: cyclical (demand-deficient), structural, frictional, real-wage, seasonal.

Q2. Explain why supply-side rather than demand-side policy is appropriate for structural unemployment. [3 marks]

• Cue. Structural unemployment is a mismatch of skills or location, not a lack of demand, so it needs retraining, improved mobility and regional policy; boosting aggregate demand cannot match workers to jobs they are not equipped or located for.