Employment and unemployment

Unemployment is the one macroeconomic problem that arrives with a name and an address. Inflation is a rate, growth is a percentage, the current account is a balance. Unemployment is a person who wants to work and cannot, and the damage compounds: skills decay, confidence goes, and the longer it lasts the harder it becomes to reverse. That is why economists treat it as more than a number, and why the type of unemployment matters more than the level.

There are two common ways of measuring it and they rarely agree. The claimant count records those receiving unemployment-related benefits. It is cheap and quick, because the government already holds the data, but it misses anyone who is genuinely seeking work yet ineligible to claim, and it changes whenever the eligibility rules change rather than when the economy does. The labour force survey asks a large sample whether they are working and whether they are looking, following an internationally agreed definition. It is more accurate and internationally comparable, but slower and more expensive. The survey figure is normally the higher of the two.

The types

Frictional unemployment is the short-term unemployment of people moving between jobs. It exists even in a healthy economy and is not, in moderation, a problem. Structural unemployment arises when the skills or the location of workers no longer match the jobs available, typically because an industry has declined. It is long-lasting and the hardest to cure. Cyclical unemployment, sometimes called demand-deficient unemployment, occurs when total demand in the economy falls and firms need fewer workers; it rises in recession and falls in recovery. Seasonal unemployment follows predictable patterns in the year, affecting agriculture, construction and tourism.

Technological unemployment is a form of structural unemployment caused by new technology replacing workers, as when self-service checkouts reduce the number of cashiers a supermarket needs or automated machines replace workers on a production line. New technology usually creates jobs elsewhere, in designing, making and maintaining the machines, but the workers who lose their jobs may not have the skills to do those new jobs.

The consequences run in three directions at once. For the individual there is lost income, and beyond that a loss of skills and often of health and self-esteem. For the government there is a double hit: benefit payments rise while income tax and spending tax receipts fall, so the budget position worsens from both sides simultaneously. For the economy as a whole, output that could have been produced is simply lost forever, and unemployed workers spend less, which reduces demand for other firms and can deepen the downturn that caused the unemployment.

Firms feel unemployment too. Falling demand means lower sales and profits, but a large pool of unemployed workers also means firms can recruit more easily and may pay lower wages. Over a long period, though, the skills of the unemployed decline, so firms find it harder to hire the trained workers they need when demand recovers.

Governments use several policies to reduce unemployment, and each suits a different type. Expansionary fiscal policy, cutting taxes or raising government spending, and expansionary monetary policy, cutting interest rates, raise total demand, so firms produce more and hire more workers: they work against cyclical unemployment. Supply-side policies tackle structural and frictional unemployment: education and retraining match workers' skills to the jobs available, better job centres and information help people find vacancies faster, and help with moving home or subsidies for firms that set up in areas of high unemployment tackle the geographical mismatch. Demand policies work quickly but may raise inflation; supply-side policies take years but tackle the cause.