Types of Unemployment


Readers Question: What are the types of unemployment? Firstly, we can make a distinction between: Supply-side unemployment (the natural rate of unemployment). These are usually microeconomic imbalances in labour markets. Demand-side unemployment (Unemployment caused by lack of aggregate demand in the economy). In recessions, we can expect demand deficient unemployment (sometimes called cyclical unemployment) to …

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Claimant count – unemployment

claimant-count-lfs unemployment

The claimant count records the number of people receiving unemployment benefits from the government. In the UK, the claimant count currently measures everyone who receives Job Seekers Allowance (JSA). To receive JSA, the applicant must be actively seeking work and provide evidence and commitment of efforts to find work. The claimant count method is one …

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Investment and Aggregate Demand


Readers Question: What are the effects of increased investment on aggregate demand in the short term and the long term. Investment means capital expenditure (e.g. purchasing machines or building bigger factory) Investment is a component of AD –  AD+ C+I+G+X-M. Investment spending takes about 15% of AD; it is not as significant as consumer spending …

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Underemployment definition and index


Definition: Underemployment is defined as a situation where people are working fewer hours than they wish; e.g. you would like to work 40 hours a week, but the firm only gives you 30 hours.

Underemployment may also refer to the fact workers accept jobs that don’t utilise their skills. e.g. graduate working in McDonald’s may be considered to be ‘under-employed’)

Underemployment in UK

According to the Office for National Statistics, there are 2.8 million workers in Britain who are working fewer hours than they would like (link). This could include people forced to work part-time rather than full time. This figure of underemployment has increased during the recession because firms have sought to avoid paying redundancy by reducing working hours and therefore cost of labour.

Underemployment does not have as many costs as official unemployment. But, it does mean the underemployed have lower incomes and so will spend less. Also, under-employment needs to be considered when evaluating the output gap in the labour market and output gap of the economy.

Under-employment in the great recession

A surprising feature of the current recession is the fact unemployment is relatively lower than we might expect. (see: UK unemployment mystery)

Part of the explanation is due to the issue of underemployment.  This rise in underemployment may be due to:

  • Low real wages, therefore workers need more hours to make up for low take-home pay.
  • Firms cutting hours in order to cut costs and stay in business.
  • Underemployment might be seen as an alternative to making workers redundant. It saves the firm having the costs of firing and later rehiring workers.
  • Under-employment may indicate a more flexible labour market with firms able to change working hours and not be tied to fixed contracts. In one sense workers benefit as unemployment is lower, but it also contributes to declining real wages.

This under-employment is an important indicator because it suggests spare capacity in the labour market and needs to be considered when examining the state of the labour market. For example, if demand in the economy increased, firms could increase hours of the under-employed to increase output, and not have to increase wages.

David Bell and David Blanchflower have created a new index which combines aggregate under-employment with the actual unemployment rate. This gives a wider overall perspective of the labour market.

Also, some workers may be ‘over-employed’ working more hours than they want, e.g. workers over 50 may prefer lower hours and lower pay. This index takes into account the level of underemployment – over-employment.

Under-employment, Unemployment index


Source: Underemployment NIESR | Original pdf

The graph shows how in the boom years, there is little aggregate under-employment. The number of people claiming they are underemployed outweighed by those who say they are working too many hours. However, since the start of the recession, there is a significant rise in under-employment. This means the index showing ‘excess capacity’ in the labour market is greater than the unemployment rate.

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Supply Side Policies for Reducing Unemployment

To what extent can supply side policies reduce unemployment? To try and reduce unemployment, the government can provide interventionist supply-side policies, such as better training and education or it can try free-market policies, such as increasing labour market flexibility. However, there is a limit because supply-side policies are ineffective in dealing with cyclical (demand-deficient unemployment) …

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Cyclical Unemployment


  Definition – Cyclical Unemployment is unemployment due to a period of negative economic growth, or economic slowdown. In a recession, cyclical unemployment will tend to rise sharply. Peaks in unemployment correspond with swings in the economic cycle. Recessions of 1981,1991/92 and 2008/09 Why unemployment rises in a recession If there are fewer orders for …

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Low economic growth and unemployment

Readers Question: Why is it that when there is low economic growth, unemployment rises? A low rate of economic growth can cause higher unemployment. Though it is not always the case. During 2010-13 the UK experienced a slow rate of economic growth, but unexpectedly unemployment fell. If there is negative economic growth (recession) we would …

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