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.
Unemployment
People of working age who are without work, are available for work and are actively seeking work.
All three conditions matter and dropping one loses the mark. Someone who has retired is not unemployed, because they are not seeking work. Nor is a full-time student, nor someone who has given up looking. 'People without a job' is not the definition and is marked as incomplete.
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.
Percentage points against percentages
A country's unemployment rate rises from 5% to 6% over a year. A newspaper reports this as 'a 1% rise in unemployment'. Calculate the change correctly in both forms and explain why the newspaper's phrasing is misleading.
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.
Questions usually give you a scenario and expect the right type named. A coal miner unemployed after the pit closes is structural, not cyclical, even though it happened during a downturn. A hotel worker without shifts in January is seasonal. A graduate spending two months choosing between offers is frictional. Naming the type and then giving the reason from the scenario is what secures both marks.
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.
Draw a production possibility curve and mark a point inside it. Label that point as an economy with cyclical unemployment. Show the movement that would occur if demand recovered, and separately show what would be needed to reduce structural unemployment once the economy is back on the curve.
This separates the two problems visually. Cyclical unemployment is a point inside the curve, so recovery is a movement towards it using capacity that already exists. Structural unemployment persists even on the curve, because the mismatch is between the skills people have and the jobs available, so curing it requires retraining rather than more demand.
A shipyard closes and its welders remain out of work for three years despite vacancies existing in software and healthcare. This is best described as:
Which consequence of higher unemployment affects the government budget from both directions at once?