Unemployment
Key terms
Define each term.
Multiple choice
Circle the correct answer.
Which policy is most likely to reduce structural unemployment?
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?
Worked problems
Show your working.
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.
Diagrams
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.
Answers
Unemployment: People of working age who are without work, are available for work and are actively seeking work.
Employment: The use of labour in producing goods and services: people of working age who are in paid work, full time or part time, or self-employed.
Full employment: A situation where everyone of working age who wants a job at the current wage can find one, so the only unemployment is short-term frictional or seasonal unemployment.
C. Structural unemployment exists because workers' skills do not match the jobs available. Retraining addresses that mismatch directly. The other three raise total demand, which helps cyclical unemployment but does not give a redundant worker the skills a vacancy needs.
C. Jobs exist, so this is not a shortage of demand. The problem is that the skills of the welders do not match the vacancies available, which is the definition of structural unemployment. The three-year duration also rules out frictional, which is short term by nature.
B. Spending rises because more people claim benefits, and revenue falls because fewer people pay income tax and unemployed households spend less, so indirect tax receipts drop too. The other three are real costs but they fall on the economy or the individual rather than directly on the budget.
Step 1. Calculate the change in percentage points. 6% - 5% = 1 percentage point. This is the difference between the two rates.
Step 2. Calculate the percentage change. Percentage change = ((6 - 5) / 5) x 100 = 20%. Unemployment has risen by a fifth.
Step 3. Identify what the newspaper got wrong. 'A 1% rise' suggests the increase was small. In fact one in five more people are unemployed than a year ago. The rate rose by 1 percentage point, not by 1%.
Step 4. Show why it matters in the other direction too. Suppose unemployment falls from 10% to 9%. That is also 1 percentage point, but only a 10% fall, because the base is larger. The same percentage point change means a different proportional change depending on where you start, which is why data-response answers must say which measure they are using.
This distinction appears constantly in data-response questions across inflation, growth and unemployment alike. Write 'percentage points' when you mean percentage points. Examiners penalise the confusion because it changes the size of the claim being made.
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.