The unemployment rate is the share of the labour force without a job.
Our example (made-up numbers)
| Labour force (million) | Unemployed (million) | Unemployment rate |
|---|---|---|
| 28.5 | 2.1 | 7.4% |
The points to remember
- Unemployment rate = unemployed ÷ labour force × 100: 2.1 ÷ 28.5 × 100 = 7.4%.
- The labour force = people in work plus those looking for work.
- The rate misses hidden unemployment (people who gave up looking) and underemployment (part-time workers who want more hours).
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Not all unemployment is the same, and the cause decides the cure.
Four types of unemployment
Frictional
Between jobs: a graduate searching, someone moving town.
Seasonal
Jobs that vanish at certain times of year: ski instructors, fruit pickers.
Structural
Skills or location no longer match the jobs: industries close, machines replace workers.
Cyclical
Too little spending in a recession: firms cut jobs everywhere.
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The natural rate: The natural rate of unemployment = frictional + seasonal + structural: what remains even at full employment.
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When the whole economy slows, unemployment rises everywhere.
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What unemployment costs
| Economic costs | Personal and social costs |
|---|---|
| Lost output: the economy is inside its PPC | Lower income and living standards |
| Lower tax revenue, higher benefit spending: a bigger budget deficit | Stress, poorer health, family strain |
| Skills fade the longer people are out of work (hysteresis) | More crime and social problems in hard-hit areas |
| More inequality | Lost self-esteem |
Paper 1 asked this in May 2023, as part (a) for 10 marks.
Explain the natural rate of unemployment.
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See the answer broken into clear points, with guidance on how each point earns marks.
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Watch the graph build step by step in study mode.
What the diagram must show
- Axes: W (wage) up, Q (number of workers) across.
- DL1, DL2 and SL labelled; DL shifting left.
- Either Q1 to Q2 at the new equilibrium, or the surplus at the old wage W1.
How the 10 marks are given
| Marks | What your answer needs |
|---|---|
| 9–10 | Theory fully explained, terms used correctly all the way through, the diagram included and fully explained |
| 7–8 | Theory explained, terms mostly right, the diagram included and explained |
| 5–6 | Theory partly explained, some terms, the diagram included |
| 1–4 | Theory only described or stated; few relevant terms |