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The state of not having a job, especially if one is available for work. For example, a person who is laid off and still wishes to work may be considered unemployed. The unemployment rate of a region is an important indicator of economic health.


the non-utilization of part of the economy's available labour (and capital) resources. Because idle resources lead to a loss of potential output to the economy and the divisive social effects of unemployment, most governments accord a high priority to the achievement of a high level of employment in formulating their ECONOMIC POLICIES.

In the UK two measures are commonly used by the government to calculate the UNEMPLOYMENT RATE:

  1. the ‘claimant count unemployment measure’ which is based on the number of people who register as unemployed at JOB CENTRE offices and qualify for the JOBSEEKERS ALLOWANCE;
  2. the ‘International Labour Organization (ILO) unemployment measure’ which is based on a LABOUR MARKET SURVEY which identifies people who ‘are currently out of work but are actively seeking a job’. In recent years there has been a steady fall in the numbers unemployed. In 2000 the number unemployed fell to below 1 million (a figure last achieved 25 years before), with the unemployment rate (2004) standing at 2.9% of the LABOUR FORCE (claimant count measure).

There are a number of different types of unemployment, including cyclical unemployment (short-term unemployment associated with a fall in the level of business activity, see BUSINESS CYCLE); seasonal unemployment (short-term unemployment associated with changes in the demand for particular products at different seasons of the year); frictional unemployment (short-term unemployment associated with people changing jobs); structural unemployment (long-term unemployment associated with the decline of particular industries and automation of production processes); ‘voluntary’ unemployment (when people who are available for work nonetheless choose not to offer themselves for employment at ‘going’ wage rates because they are ‘cushioned’ by social security benefits).

There are two basic causes of long-term unemployment:

  1. a level of total demand in the economy which is too low in relation to the supply capacity of the economy to produce goods and services. The traditional prescription for dealing with this situation is for the government to boost spending in the economy by decreasing taxes and by increasing its own expenditure (see FISCAL POLICY), and by expanding the money supply and lowering interest rates (see MONETARY POLICY);
  2. supply-side deficiencies, particularly a lack of investment in plant and new products, low productivity and LABOUR MARKET distortions.

Remedies for supply-side problems include improving industrial efficiency and stimulating innovation, enterprise and business start-ups. (See INDUSTRIAL POLICY, COMPETITION POLICY, ENTERPRISE INVESTMENT SCHEME, ENTERPRISE INVESTMENT GRANT, REGIONAL POLICY); encouraging people to seek paid work (see JOBSEEKER ALLOWANCE, WORKING FAMILIES TAX CREDIT); and promoting more flexible labour markets by a variety of trade union legislation aimed at curbing disruptive INDUSTRIAL DISPUTES (see STRIKE, INDUSTRIAL ACTION).

In the past most UK governments have not formulated fiscal and monetary policy with any specific unemployment ‘target’ in mind. The present government, however, is committed to reducing unemployment as much as possible and see the best way of achieving this is to sustain stable monetary conditions. Specifically, the government has committed itself to an annual inflation rate ‘target’ of not more than 2% and the remit of the MONETARY POLICY COMMITTEE of the Bank of England is to set official INTEREST RATES so as to achieve this target. See VACANCY RATE, DE-INDUSTRIALIZATION, STRUCTURE OF INDUSTRY.

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Fig. 190 Unemployment. (e) Real wage unemployment.
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Fig. 190 Unemployment. (d) Voluntary’ unemployment.
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Fig. 190 Unemployment. (c) Demand-deficient unemployment.
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Fig. 190 Unemployment. (b) Unemployment, GROUP OF 7,1981–2003. Source: World Economic Outlook, IMF, 2004.
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Fig. 190 Unemployment. (a) Unemployment and INFLATION, 1984–2003. Source: Office for National Statistics.


The nonutilization of LABOUR (and CAPITAL) resources, as a result of which the actual output of the economy (see ACTUAL GROSS NATIONAL PRODUCT) is below its POTENTIAL GROSS NATIONAL PRODUCT. Resources lie idle and output is lost. The elimination of unemployment and the achievement of FULL EMPLOYMENT is one of the main objectives of MACROECONOMIC POLICY.

In the UK, two measures are commonly used by the government to calculate the unemployment rate:

  1. the CLAIMANT COUNT UNEMPLOYMENT MEASURE, which is based on the number of people who register as unemployed at JOB CENTRE offices and qualify for the JOBSEEKERS ALLOWANCE;

UNEMPLOYMENT MEASURE, which is based on a ‘labour market survey’ that identifies those people who ‘are currently out of work but are actively seeking a job’.

Both measures are flawed in various respects, the claimant count measure because, by definition, it excludes people who are out of work but do not claim benefits, and the ILO measure because some people say they are seeking work but in practice they are not. In both cases there is an element of‘voluntary unemployment’ involved (see below) since people may not qualify for unemployment benefit or choose not to work because they are better off on SOCIAL SECURITY BENEFITS rather than taking low-paid employment (for example, a man or woman heading up a one-parent family). The ILO measure invariably produces a higher unemployment rate than the claimant count measure. In the third quarter of 2004, the UK unemployment rate was calculated at 4.6% using the ILO measure compared to 2.7% using the claimant count measure.

The problem of producing reliable figures is complicated further by the existence of the BLACK ECONOMY (see MOONLIGHTER) where people undertake paid work ‘on the side’ but do not notify the authorities in order to continue to receive social security benefits.

Fig. 190 (a) shows the UK unemployment rate (and INFLATION rate - see overleaf) using the ILO measure for the period 1984–2004, and Fig. 190 (b) provides some international comparisons of unemployment rates.

There are various causes of unemployment, which can be broadly divided into three main types: (i) demand-deficient (cyclical) unemployment; (ii) unemployment caused by changes in demand patterns; and (iii) supply-side (or so-called ‘natural’) unemployment.

Demand-deficient or cyclical unemployment occurs whenever AGGREGATE DEMAND is insufficient to purchase full employment AGGREGATE SUPPLY (potential GNP). In the EQUILIBRIUM LEVEL OF NATIONAL INCOME MODEL, depicted in Fig%. 190, equilibrium national income is Y1 compared to the full employment national income Y2, because of a shortfall of spending equal to the DEFLATIONARY GAP (XZ). The traditional remedy for this situation is for the authorities to boost spending by reflationary FISCAL POLICY and MONETARY POLICY measures to shift aggregate demand from AD1 to AD2 (see DEMAND MANAGEMENT). Demand-deficient unemployment is often referred to as ‘involuntary’ unemployment since people who want to work are laid offbecause of recessionary conditions (contrast with ‘voluntary unemployment - see below).

In addition to deficiencies in total demand, changes in demand patterns can cause unemployment. For example, ‘structural unemployment’ is caused by the secular (long-term) decline in the demand for particular products, leading to the contraction of those industries that supply them, such as (in the UK) coal mining, shipbuilding and textiles. These industries are concentrated in particular regions in a country, and this may exacerbate ‘regional unemployment’ as the decline of these industries in turn leads to a lower demand for the outputs of their local suppliers and serves to lower spending in the region as a whole (see MULTIPLIER). Structural unemployment is also associated with ‘supply-side’ factors in particular technological progress and foreign competition (see below). Also, short-term ‘seasonal’ changes in demand can lead to the creation and elimination of jobs (e.g. the loss of jobs in the UK tourist industry during the winter months).

Supply-side unemployment includes several types. First, ‘technological unemployment’, which is the loss of jobs as a result of the introduction of new technology that improves productivity, reducing the amount of labour needed to produce a particular quantity of a product and/or making particular labour skills obsolete.

Second, ‘frictional unemployment’, which is unemployment associated with people who are in the process of moving from one job to another. The amount of frictional unemployment and how temporary that unemployment is will depend upon whether workers have the appropriate skills for the jobs that are available and whether these jobs are in the appropriate region of the country.

Third, ‘voluntary unemployment’ occurs when people who are available for work nonetheless choose not to offer themselves for employment at ‘going’ wage rates. This is often because people are better off on ‘the dole’ and receiving the JOBSEEKERS ALLOWANCE and other social security benefits rather than taking low-paid work. Voluntary unemployment is an example of MARKET FAILURE -a distortion in the smooth functioning of supply and demand conditions in the labour market. The voluntary unemployment proposition is depicted in Fig%. 190. In the figure, Ld is the demand for labour and Ls the nominal supply of labour (i.e. people who want to work). Ls* represents the number of people who are willing to accept (rather than want) work at the real wages offered. Equilibrium in the figure occurs at E*. At E*, any unemployment is entirely voluntary. At the equilibrium real wage rate W*, ON people want to be in the labour force, but because of market failure only ON* are prepared to accept the going real wage rate. The distance N*-N thus represents the amount of unemployment (referred to conventionally as the NATURAL RATE OF UNEMPLOYMENT).

Fourth, a further example of‘market failure’ is unemployment that occurs when real wage rates are driven up above the market-clearing rate. ‘Real wage (classical) unemployment’ occurs when real WAGE RATES are too high so that workers ‘price themselves out of jobs’, as shown in Fig%. 190. If wages are set at Wl rather than W (as a result, say, of MINIMUM WAGE legislation or trade union bargaining power), unemployment equivalent to Q1Q2 will be created.

Finally, in an increasingly open and interdependent international economy, countries heavily engaged in international trade may suffer unemployment because of international competition. If a country has concentrated its resources on the production of products for which long-term world demand is declining, or it fails to invest in new products or in modern plant, then its price and non-price competitiveness vis-à-vis overseas suppliers will deteriorate. This can result in the progressive displacement of domestic output by more competitive foreign products (see IMPORT PENETRATION) and a widespread loss of jobs.

Moreover, consideration of ‘supply-side’ factors, particularly that relating to ‘voluntary’ unemployment, has led economists to postulate that unemployment rates are associated with INFLATION and that unemployment cannot be reduced below a certain level (the ‘natural rate of unemployment’) without stoking up inflation (see PHILLIPS CURVE ‘trade-off). Some economists, however, go beyond merely suggesting an inverse relationship between unemployment and inflation and hypothesize that inflation itself can sometimes cause unemployment to increase by driving up domestic prices and money wages to levels greater than underlying PRODUCTIVITY growth and the prices of competitive imported products. (See EXPECTATIONS-ADJUSTED/AUGMENTED PHILLIPS CURVE).

Various policy measures may be adopted to remove unemployment caused by changes in demand patterns or supply-side deficiencies. INVESTMENT INCENTIVES (grants, subsidies, tax breaks, etc.) can be used generally to increase the start-up of new businesses and industries and the expansion of existing businesses and industries to assist in the removal of‘structural’ and ‘technological’ unemployment (see INDUSTRIAL POLICY); more particularly, such incentives can be targeted to remove ‘regional’ unemployment by encouraging new investment in depressed areas (see REGIONAL POLICY). Additionally, assistance with removal expenses and housing can improve the geographic mobility of workers.

Likewise, the provision of TRAINING facilities can be used to improve occupational mobility, again helping to offset ‘structural’ and ‘technological’ unemployment. ‘Real wage’ unemployment can be reduced by improving the flexibility of the LABOUR MARKET by, for example, introducing EMPLOYMENT LAWS limiting the power of trade unions to operate ‘closed shops’ and other restrictive labour practices.

Finally, the government can tackle ‘voluntary’ unemployment by a combination of measures to reduce the attractiveness of social security benefits while improving incentives to take paid work (see WORKING FAMILIES TAX CREDIT, JOBSEEKERS ALLOWANCE).

To facilitate and assist unemployed people back into work, the government has set up a nationwide network of JOB CENTRES, coordinated by JOBCENTRE PLUS, an agency of the DEPARTMENT FOR WORK AND PENSIONS. Job centres bring together persons seeking work with employers seeking to fill vacancies. A major employment initiative in recent years has been the NEW DEAL programme aimed at reducing youth unemployment and long-term unemployment among older workers.

Collectively, these measures may serve to increase the general level and efficiency of resource use in the economy, thus improving the output potential and competitiveness of the country vis-à-vis international trade partners.

In the past, most UK governments have not formulated FISCAL and MONETARY POLICY with any specific unemployment ‘target’ in mind. The present government, however, is committed to reducing unemployment as much as possible and sees the best way of achieving this as sustaining stable monetary conditions. Specifically, the government has committed itself to an annual inflation rate ‘target’ of not more than 2%, and the remit of the MONETARY POLICY COMMITTEE of the Bank of England is to set official INTEREST RATES so as to achieve this target. Likewise, in the European Union (EU), the EUROPEAN CENTRAL BANK (under the Maastricht Treaty ‘convergence’ criteria for ECONOMIC and MONETARY UNION) has set an average EU-wide inflation rate target of a maximum 2%.


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