Employment and unemployment are vital indicators of economic performance, influencing government policy, social welfare, and business confidence in the UK and around the world.
Definitions
Employment
Employment refers to individuals of working age (typically 16–64 in the UK) who are engaged in paid work, whether full-time, part-time, temporary, or self-employed. It includes:
Employees working for wages or salaries.
Self-employed individuals running their own businesses or working freelance.
People on temporary contracts or apprenticeships.
Being employed implies active contribution to economic output and tax revenues. High levels of employment are associated with greater national income and improved living standards.
Unemployment
Unemployment is defined as a situation where individuals who are willing and able to work, and are actively seeking employment, are not currently employed. Key conditions include:
They must be available to start work.
They must have actively searched for work within the last four weeks.
Unemployment reflects underutilisation of labour and is a sign of economic inefficiency. Persistent unemployment can lead to lower output, increased public spending, and social issues such as poverty.
Under-employment
Under-employment refers to individuals who are in work but:
Desire more working hours than they currently have (e.g. part-time workers wanting full-time positions).
Are working in roles that do not utilise their full skill set or qualifications (e.g. a university graduate working in a job that requires only GCSEs).
Under-employment highlights hidden inefficiencies in the labour market and may mask the full extent of labour underutilisation in the economy.
Measures of unemployment
Unemployment can be measured in different ways, each with its own scope and limitations. In the UK, two principal methods are used.
Claimant Count
The Claimant Count is the number of people receiving unemployment-related benefits, such as Jobseeker’s Allowance (JSA) or Universal Credit (with job-seeking conditions attached).
It includes only those eligible for benefits, which means not all unemployed individuals are captured.
It is updated monthly using administrative data from the Department for Work and Pensions (DWP).
Strengths:
It is readily available, frequent, and cost-effective to compile.
Provides a direct measure of those relying on state support.
Weaknesses:
It may underestimate unemployment by excluding those not claiming benefits.
Eligibility rules and stigma associated with claiming may skew the data.
It does not capture the duration of unemployment or under-employment.
ILO Measure / Labour Force Survey (LFS)
The ILO Measure, based on guidelines from the International Labour Organization, is derived from the UK Labour Force Survey, a large household survey conducted by the Office for National Statistics (ONS).
It defines unemployed individuals as those who:
Are without a job.
Have actively sought work in the past four weeks.
Are available to start work in the next two weeks.
Strengths:
Captures a wider range of unemployed individuals than the Claimant Count.
Enables comparison across countries using standardised definitions.
Includes those not eligible or not claiming benefits.
Weaknesses:
It is based on self-reported data, which may be subject to bias.
It is updated less frequently and is more expensive to conduct.
Sampling errors may affect accuracy.
Differences between the two measures
The Claimant Count only includes benefit claimants, while the ILO Measure includes anyone meeting the unemployment criteria, regardless of benefit status.
The ILO measure generally produces higher unemployment figures due to its broader definition.
The Claimant Count is more timely but less comprehensive.
Policymakers and analysts often look at both together for a fuller picture of labour market conditions.
Labour market indicators
Employment rate
The employment rate is the percentage of the working-age population (aged 16 to 64) who are in paid employment.
Formula:
Employment rate = (Number of people in employment ÷ Working-age population) × 100
A high employment rate suggests a healthy labour market and strong economic performance. Trends in the employment rate help assess:
Labour market participation.
Gender and age-specific employment dynamics.
Impact of economic policies and growth.
Unemployment rate
The unemployment rate is the proportion of the labour force that is unemployed.
Formula:
Unemployment rate = (Number of unemployed ÷ Labour force) × 100
The labour force includes both the employed and those actively seeking work. A rising unemployment rate may indicate economic downturn, while a falling rate may point to recovery or growth.
Inactivity rate
The inactivity rate measures the proportion of people of working age who are neither employed nor actively seeking employment.
This includes:
Full-time students not working or seeking work.
Early retirees.
Long-term sick or disabled individuals.
Carers and those not needing or wanting to work.
High inactivity rates can reflect structural issues in the economy, such as health-related barriers, inadequate childcare provision, or educational demands.
Causes of unemployment
Structural unemployment
Structural unemployment occurs when the structure of the economy changes, leading to a mismatch between workers’ skills and available jobs. Causes include:
Long-term decline in traditional industries (e.g. coal, steel).
Automation and technological innovation displacing manual jobs.
Globalisation shifting production to low-cost countries.
This form of unemployment tends to be regional and long-term, requiring targeted policy responses such as:
Retraining programmes.
Education reform.
Regional development initiatives.
Frictional unemployment
Frictional unemployment arises from the time it takes individuals to move between jobs. It reflects job-search processes and career transitions.
Common causes:
Career changes
Voluntary resignation.
Graduates entering the labour market.
While a sign of a dynamic and flexible economy, prolonged frictional unemployment can reduce productivity and morale. Improved job-matching services and digital platforms can help reduce it.
Seasonal unemployment
Seasonal unemployment results from predictable changes in demand for labour at certain times of the year.
Examples:
Tourism jobs declining in winter.
Retail jobs increasing in December.
Agricultural work tied to harvest seasons.
Although expected and often short-term, it can affect income stability in certain regions or sectors. Diversifying local economies and encouraging off-season employment can mitigate its impact.
Cyclical (demand-deficient) unemployment
Cyclical unemployment occurs during downturns in the business cycle when aggregate demand falls. This leads to:
Lower production.
Business closures.
Mass redundancies.
It is associated with recessions and is the most visible and politically sensitive form of unemployment.
Policy responses include:
Expansionary fiscal policy (e.g. increased government spending).
Monetary easing (e.g. interest rate cuts).
Job creation schemes and infrastructure investment.
Real wage inflexibility
Real wage unemployment happens when wages are artificially kept above the equilibrium level, causing an excess supply of labour.
Causes:
Legally enforced minimum wages.
Powerful trade unions negotiating high wages.
Long-term contracts resisting market wage adjustments.
Solutions may involve:
Wage subsidies for firms.
More flexible labour market institutions.
Training to increase worker productivity.
Effects of unemployment
On consumers
Reduced disposable income leads to lower consumption, particularly on non-essential goods.
Rising unemployment can create a negative wealth effect, discouraging borrowing and spending.
Households may face increased financial insecurity and deteriorating living standards.
On firms
Falling consumer demand may reduce revenue and profits.
Labour becomes more abundant and potentially cheaper, giving employers more choice.
Long-term unemployment can reduce the available pool of skilled and motivated workers.
On workers
Extended periods of unemployment can lead to:
Mental health challenges, such as depression or anxiety.
Skill atrophy, where unused skills deteriorate.
Loss of confidence and employability.
Under-employed workers may feel undervalued and experience lower job satisfaction, affecting productivity.
On government
Increased public spending on welfare benefits, housing, and support services.
Lower tax revenues due to reduced income and VAT from unemployed individuals.
Pressure on public finances can lead to higher borrowing or austerity measures.
Unemployment may prompt political pressure for reform and stimulate policy debates.
On society
Unemployment can contribute to:
Higher inequality and social division.
Crime and antisocial behaviour, particularly in deprived communities.
Political instability and rising populism.
Young people facing long-term joblessness may experience a “scarring effect” impacting lifelong earnings and aspirations.
Migration and skills
Role of migration
Migrants often play a key role in filling labour shortages, especially in:
Health and social care.
Hospitality and food services.
Construction and agriculture.
They can help ease pressure on the domestic workforce and increase overall productivity.
Wage and productivity impacts
Migration can increase productivity by bringing in skills and experience that complement domestic labour.
In low-skilled sectors, it may suppress wages slightly due to increased labour supply.
In high-skilled sectors, migration tends to boost innovation and economic growth.
Displacement and skills challenges
Concerns may arise over job displacement, particularly during periods of weak economic growth.
Migration pressures may exacerbate competition in already struggling job markets.
To maintain balance, there is a growing need for:
Investment in domestic upskilling and vocational training.
Better integration of migrants into the workforce through language and education support.
Policies to address regional imbalances and labour mismatches.
FAQ
The unemployment rate can sometimes fall during a recession due to changes in labour market participation rather than genuine job growth. For instance, discouraged workers may stop actively looking for work because they believe no jobs are available. As the unemployment rate only includes those actively seeking employment, these individuals are reclassified as economically inactive, reducing the measured unemployment rate despite worsening economic conditions. Additionally, growth in part-time or gig economy roles may superficially boost employment figures without reflecting improved job security or income. Government employment schemes or subsidised jobs can also mask underlying weakness in labour demand. Some sectors may remain resilient—such as healthcare, education, or essential retail—and continue hiring even in downturns. Firms may also choose to retain workers at reduced hours or wages, avoiding outright redundancies. Therefore, a falling unemployment rate does not necessarily indicate economic recovery and must be analysed alongside other indicators such as GDP growth, under-employment, and inactivity rates.
Long-term unemployment—defined as being out of work for 12 months or more—has far more damaging and persistent economic effects than short-term unemployment. Workers who are long-term unemployed may experience skill atrophy, where their qualifications and expertise become outdated. This reduces their future employability and contributes to a mismatch between job openings and worker skills. Long-term unemployment is also associated with declining motivation and confidence, psychological distress, and a higher dependency on welfare systems. For the economy, it means lower productivity, weaker aggregate demand, and higher fiscal costs due to prolonged benefit payments. Short-term unemployment, on the other hand, is usually a result of temporary job transitions or cyclical changes and has fewer long-term implications if individuals are re-employed quickly. Persistent long-term unemployment also has a negative multiplier effect on communities, increasing inequality and lowering potential output. Policymakers focus on preventing temporary joblessness from turning into long-term inactivity through retraining, incentives, and job search assistance.
Zero-hour contracts, where employees are not guaranteed a minimum number of working hours, can complicate the interpretation of employment statistics. Individuals on zero-hour contracts are counted as employed in official figures as long as they have performed at least one hour of paid work during the survey reference week. This inclusion inflates employment numbers, potentially painting an overly optimistic picture of labour market strength. However, many on zero-hour contracts face income instability, unpredictable work schedules, and limited job security, characteristics more commonly associated with under-employment. These contracts can also mask hidden unemployment, as workers may wish to work more hours but are unable to secure them. While they offer flexibility for employers and suit some workers—such as students—they may undermine overall job quality. For economists and policymakers, it is essential to distinguish between headline employment rates and the quality or security of that employment, especially when assessing labour market resilience or designing welfare policies.
Hidden unemployment refers to individuals who would like to work but are not actively seeking employment and therefore are not counted in official unemployment statistics. This group includes discouraged workers who have stopped job hunting due to repeated failure, those undertaking unpaid family work, and others temporarily unavailable but capable of working. As they do not meet the criteria set by surveys like the Labour Force Survey or benefit eligibility rules, they remain outside the unemployment count. Hidden unemployment distorts labour market data by underrepresenting the true extent of labour underutilisation. This can lead to misleading policy conclusions, such as assuming the economy is at full employment when significant slack still exists. Economists often look to indicators like the inactivity rate, under-employment levels, and broader measures of labour market participation to capture hidden unemployment. Addressing it involves improving job access, offering support services, and encouraging re-entry through targeted training and reduced employment barriers.
Demographic changes—such as ageing populations, migration flows, and shifts in education trends—have a significant influence on employment and unemployment rates. An ageing population leads to higher retirement rates, potentially increasing inactivity and reducing the working-age population, which can artificially lower the unemployment rate even without job creation. In contrast, high net migration often boosts labour supply, affecting employment figures depending on migrants’ participation and skill levels. Younger age cohorts spending longer in education may delay entry into the labour force, raising short-term inactivity but possibly improving long-term employment outcomes due to higher skill levels. Gender dynamics have also changed, with increased female participation affecting employment rates. Additionally, regional demographic imbalances—such as youth bulges in urban areas and ageing in rural zones—can create unequal employment pressures across the UK. These structural changes mean unemployment and employment figures must always be interpreted in the context of demographic evolution to guide effective policymaking.
Practice Questions
Evaluate the likely impact of a fall in real wages on the level of unemployment in the UK labour market.
A fall in real wages reduces the cost of hiring for firms, potentially increasing demand for labour and lowering unemployment. In flexible labour markets, firms may hire more workers, particularly in low-skilled sectors. However, if demand for goods and services is weak, firms may not expand employment despite lower wages. Real wage declines may also reduce consumer spending, lowering aggregate demand and worsening cyclical unemployment. Additionally, reduced worker motivation may impact productivity. The impact depends on the elasticity of labour demand, overall economic conditions, and whether wage falls are widespread or limited to specific sectors.
Discuss the usefulness of the ILO measure compared to the Claimant Count in assessing UK unemployment.
The ILO measure provides a broader view of unemployment, including those not claiming benefits but still actively seeking work, making it more representative of actual labour market conditions. It allows international comparisons using standardised criteria. However, as it is survey-based, it may suffer from sampling bias and is less timely. The Claimant Count is more up-to-date and precise in showing those reliant on state support but underestimates unemployment due to eligibility restrictions and non-claimants. For a complete analysis of unemployment, both measures are useful, with the ILO offering depth and the Claimant Count offering regular, administrative insights.
