This page looks at unemployment, specifically a definition of unemployment, how it is calculated and the social and economic costs of unemployment.
How do we classify a person as unemployed and how is unemployment measured. What are the consequences for unemployment for the individual and the economy.
Lesson time: 90 minutes
Define the term unemployment and explain how the unemployment rate is calculated.
Explain the difficulties in measuring unemployment, including the existence of hidden unemployment, the existence of underemployment, and the fact that it is an average and therefore ignores regional, ethnic, age and gender disparities.
Discuss possible economic consequences of unemployment, including a loss of GDP, loss of tax revenue, increased cost of unemployment benefits, loss of income for individuals, and greater disparities in the distribution of income.
Discuss possible personal and social consequences of unemployment, including increased crime rates, increased stress levels, increased indebtedness, homelessness and family breakdown.
1. Beginning activity - begin with the opening question and then discuss this as a class. (Allow 10 minutes in total)
2. Processes - technical vocabulary - the students can learn the background information from the opening video, the first activity and the list of key terms. Allow 20 minutes.
3. Developing the theory - activities 3 and 4 develop the theory through a question of whether the official unemployment rate can be trusted as well as looking at regional differences in unemployment with the UK - a nation with close to full employment, but where there are significant regional differences between different areas. (15 minutes)
4. Applying the theory - activities 5 and 6 apply the theory to two specific sub-sections of the unemployed - youth unemployment and then joblessness amongst experienced middle age workers. (25 minutes)
5. The costs of unemployment - including social and economic costs are considered in activity 7. (15 minutes)
6. Final activity - activity 8 contains a power point presentation which your classes will enjoy. (5 minutes)
Evaluate the relative success of the following nations for the year 2016:
|GDP per capita ($)||Unemployment rate (%)||Inflation (%)||Net trade (as a % of GDP)|
The four countries listed are Denmark, Kenya, Turkey and Jordan - which is which?
Country A is Turkey and despite its recent, much publicised difficulties Turkey is considered a medium to high ranking nation and has an economy consistent with this.
Country B is Jordan and is considered a low to middle income nation.
Country C is Denmark and is one the most successful of nations economically and is considered a fully developed nation.
Country D is Kenya and is currently close to the bottom of most economic ranking tables.
Economically active population - defined as a person who is actively seeking work and within the working age (18 – 65), not in full time education and declared physically fit to work. This is sometimes called the Labour force or the working population.
Unemployment rate - the number of economically active people in the economy without paid employment.
Hidden unemployment - this includes individuals who have given up looking for work as they fear they have no chance of being successful. It also contains some part-time workers who are seeking full time work as well as many overqualified people e.g. university graduates working in jobs where no education is required. This is also referred to as underemployment.
Economic costs of unemployment - the gap between national output when the economy is in recession and the output level when the economy is at full employment, i.e. the size of the recessionary gap. Examples include the fall in tax revenues and consumption, when workers are laid off and the costs of the government making additional transfer payments to those households on low incomes or without work.
Social costs of unemployment - examples include a loss of income and fall in living standards. This impacts on the unemployed worker's family as well as the individual. If the period without work becomes long term then the unemployed person may suffer from a loss of self-esteem, motivation, depression and potential mental illness.
Unemployment (out of work) payments - payments made by some governments to the unemployed, which can negate some of the financial loss to the family when a person loses their job.
The activities on this page are available as a class handout at: Unemployment
Activity 2: What is unemployment?
Start by watching the following short video and then complete the questions that follow:
(a) Explain which of the following people would be included in the nation's unemployment rate:
- a housewife who wishes to work but not currently employed
- a part time worker seeking full time employment
- a student at college looking for a part-time job to supplement their studies
- a worker of 55 - 60 who voluntary retires.
It depends which country is doing the counting. All four of the above individuals are not counted as officially unemployed in many countries but perhaps they should be as they are hoping to find work?
(b) Why does the above make it difficult for nations to accurately calculate unemployment and why is it also sometimes difficult to compare unemployment rates between different nations?
Deciding who to count as unemployed and who not to count presents a challenge for any unemployment statistician. Each country has a different measure of unemployment and who qualifies as unemployed and who does not. This makes it more difficult to compare unemployment rates between countries.
Activity 3: The real rate of unemployment
Watch the following video and then answer the question: why is the official rate of unemployment lower than the number of people unemployed?
The differences between the official rate of unemployment in the USA which currently stands at 5% and what the video calls the real rate can be explained by the following:
- The USA government, like most governments, discourages unemployed workers from being classified as unemployed by forcing those who want to claim benefits to prove that they have actively been trying to find work.
- Different classifications of who is economically active and who is not, e.g. the lottery winner who is not looking for work.
- Governments do not consider part-time workers or under employed workers as unemployed where as some economists argue that they should be counted.
Activity 4: Distribution of unemployment
The map to the right illustrates the distribution of unemployment rates in the UK, where national unemployment stands at just 4%. However, this ranges from almost zero in some areas to nearly 30% in others.
(a) Explain the challenges this presents for the nation?
In some parts of the country the nation faces labour shortages, with firms forced to outbid each other for the few workers that are available, while in other areas skilled workers cannot find work and this would be illustrated by an output gap in the economy. Unsurprisingly areas with high unemployment rates also have much higher rates of poverty and social deprivation.
(b) Which policies might the UK employ to reduce some of the regional disparities in employment.
Subsidies / regional policies to reduce inequalities e.g. variable corporation tax rates / subsidies which favour businesses setting up in high unemployment areas. Government departments can also be transferred to deprived areas.
Activity 5: A focus on youth unemployment
The diagram on the right shows the impact of a minimum wage on youth unemployment in a country. Which unemployment type are those workers unable to find work?
To what extent would a government be advised to remove the minimum wage as a way of reducing unemployment levels?
Some economists believe that when the minimum wage is set above the equilibrium wage level, then this increases the level of real wage unemployment. Exponents of this view state that this form of unemployment is most prominent amongst low skilled and young workers.
There are arguments in favour of scrapping the minimum wage as well as arguments in support of a minimum wage. Preventing young workers from accepting very low paid work may deny those individuals the opportunity to start their careers off and gain valuable experience. On the other hand there is significant evidence to suggest that the imposition of a minimum wage has little or no bearing on the rate of unemployment. This is based on a comparison of unemployment rates in different countries that have a minimum wage. Certainly in the UK, when the then Labour government introduced a minimum wage, this had no bearing on the rate of unemployment which remained low throughout the period. More likely a minimum wage, set above the equilibrium wage level is more likely to raise production costs, especially in labour intensive service industries, which very often base their business model on the employment of low paid workers. In other words the introduction of a minimum wage is more likely to raise average price levels than unemployment levels.
Activity 6: A focus on middle and old age unemployment
The following video highlights a growing problem in many Developed nations, where a changing society and some might argue youth obsessed culture has meant an increasing numbers of experienced, highly qualified workers find themselves either unemployed or underemployed.
(a) How does this video highlight some of the difficulties faced by experienced and sometimes well qualified workers in the US?
Some of the problems identified include:
- workers losing their positions due to company restructuring
- workers that do eventually find work ending up forced to work in jobs they are over qualified for and where their salary is much lower than they were used to.
(b) Identify the difference between unemployment and underemployment.
Unemployment includes the number of economically active people in the economy without any form of paid employment. Underemployment includes individuals working part-time workers, but would rather work full time work as well as many overqualified people e.g. the African American man overqualified to do landscaping, but swallowed his pride to do what needed to be done.
Activity 7: The costs of unemployment
Watch the following video on the social and economic costs of unemployment and then answer the questions that follow.
(a) Using a suitable diagram illustrate the economic costs of unemployment to the Spanish economy.
The costs of unemployment can be represented by the gap between B and A. An AD / AS diagram illustrating a contractionary gap would also be suitable.
(b) Describe some of the social costs of unemployment.
The longer that an individual remains without work then the chances of that individual finding work diminish. Long term unemployment can lead to depression, mental illness and in some cases family breakdown. The video for example highlights the case of Miguel who would like to start a family in the future but cannot do so until he finds work and is able to support a family. In Miguel's case the problem is shared by numerous people in the community saddled with high unemployment rates.
Research the nations with the highest unemployment rate in the world. The answer is on the following presentation but remember that the following relates only to the 'official rate of unemployment' and this may not be the same as the 'real rate of unemployment'. Are 95% of Zimbabwean workers really unemployed?
In reality probably 95% of Zimbabweans are not unemployed with many working for friends or other family members although even the real rate of unemployment is likely to be very high, with the economy destroyed by decades of financial mismanagement.
Can be accessed at: Who is unemployed?