AQA A-level Economics: Employment and unemployment (7136) – Revision Notes

These revision notes condense the Employment and unemployment sub-section of AQA A-level Economics (7136), from the AQA AS and A-level Economics specification, first teaching from September 2015. The AQA website numbers it 3.2.3.2 (the combined PDF prints it as 4.2.3.2). Full explanations and longer worked examples are in the study guide. Test yourself with the practice questions, tick topics off on the checklist, start from the course hub, or take a free diagnostic. Related pages: aggregate demand and supply and labour demand and supply.

All figures are invented for illustration.

Key definitions

Term	Meaning
Labour force	Employed plus unemployed (the economically active)
Economically inactive	Not working and not seeking work (students, carers, long-term sick, early retired)
Claimant count	People claiming an unemployment-related benefit
LFS measure	Survey-based count using the ILO test: no job, available to start within two weeks, looked for work in the last four weeks
Voluntary unemployment	Choosing not to take available jobs at the going wage
Involuntary unemployment	Willing to work at the going wage but unable to find a job
Seasonal	Regular yearly fluctuation in demand for labour
Frictional	Between jobs; time spent searching and matching
Structural	Mismatch of skills or location after change in the pattern of demand
Cyclical	Shortfall of aggregate demand (demand-deficient)
Real wage unemployment	Real wage held above the market-clearing level
Natural rate	Unemployment when the economy is at potential output; no cyclical element

Formulas

Measure	Formula
Unemployment rate	unemployed / labour force x 100
Activity rate	labour force / population aged 16 and over x 100
Real wage growth	(1 + money wage growth) / (1 + inflation) - 1
Output gap	(actual - potential) / potential x 100
Unemployment at a wage W1	Ls at W1 minus Ld at W1
Potential output (simple model)	labour force x (1 - natural rate) x output per worker

Method in steps: unemployment rate

1. Add employed and unemployed to get the labour force.
2. Divide unemployed by that labour force, never by the whole population.
3. Compare with the previous period and check whether the labour force changed.

Claimant count v LFS: points to remember

• The claimant count excludes jobless people who are ineligible or do not claim, so it can be below the LFS figure. Rule changes on who can claim also alter it without any change in the labour market.
• The LFS is a sample, so it has sampling error. It uses a consistent definition, which suits international comparison.
• Neither captures hidden unemployment well: discouraged workers, and workers who want more hours.
• Reminder: a fall in the rate with unchanged employment means the labour force shrank.

Must-know distinctions

Pair	Key difference
Voluntary v involuntary	Whether the person would accept a job at the going wage
Frictional v structural	Frictional: skills match, search takes time. Structural: skills or location do not match
Structural v cyclical	Structural: vacancies exist but cannot be filled. Cyclical: too few vacancies overall
Cyclical v real wage	Cyclical: AD too low. Real wage: wage too high for the market to clear
Actual v natural rate	The gap between them is cyclical unemployment

Causes and matching policies

Cause	Demand-side or supply-side	Typical policy response
Fall in AD	Demand-side	Fiscal or monetary stimulus
Skills mismatch	Supply-side	Retraining, education, apprenticeships
Immobility	Supply-side	Housing and relocation help; regional policy
Poor information	Supply-side	Job-matching services
Generous or long-lasting benefits	Supply-side	Time limits, work-search conditions
Union power or minimum wage above equilibrium	Supply-side	Labour market reform (with a cost to workers on low pay)

Remember: the cause decides the cure. A demand boost for a skills mismatch may only raise prices.

Real wage unemployment

Method in steps

1. Find equilibrium by setting Ld = Ls.
2. Find Ld and Ls at the higher wage.
3. Unemployment = Ls minus Ld.
4. Split it if asked: job losses (equilibrium employment minus Ld) and extra entrants (Ls minus equilibrium employment).

Worked reminder (a local labour market, wage in pounds, labour in thousands): Ld = 500 - 10W and Ls = 100 + 10W. Equilibrium: 500 - 10W = 100 + 10W, so W = 20, L = 300. At W = 25: Ld = 250, Ls = 350, unemployment = 100.

Determinants of real wage unemployment: union bargaining, minimum wage level, slow downward adjustment of wages, benefit levels, and productivity relative to the real wage.

Natural rate, output gap and LRAS

• Natural rate determinants: benefit design, labour market flexibility, skills mismatch, mobility, union power, minimum wages, and how quickly industries change.
• A negative output gap goes with cyclical unemployment: actual unemployment is above the natural rate.
• Supply-side causes of unemployment change the position of the long-run aggregate supply curve. A higher natural rate means lower potential output, so LRAS shifts left. Reforms that cut it shift LRAS right.

Worked reminder (Country C): labour force 20.0 million, output per worker 50,000 pounds. If the natural rate falls from 5% to 4%:

Before: 20.0 x 0.95 = 19.0m workers x 50,000 = 950 billion
After:  20.0 x 0.96 = 19.2m workers x 50,000 = 960 billion
Change = +10 billion = +1.05%

If actual output is 900 billion against potential of 950 billion:

Gap = (900 - 950) / 950 = -5.26%
Employment = 900bn / 50,000 = 18.0m
Unemployed = 20.0 - 18.0 = 2.0m, so the rate = 10.0%
Cyclical = 19.0 - 18.0 = 1.0m

This assumes output per worker is constant. In practice firms may keep staff, or cut hours, so employment moves by less than output.

AD/AS in words: a fall in AD shifts the AD curve left along the short-run AS curve to a lower price level and lower real GDP, below the vertical LRAS. That distance is the negative output gap.

Consequences

	Effects
Individuals	Lower income, poverty, skill loss, poorer health, family strain, exclusion
Economy	Lost output, higher benefit spending, lower tax revenue, weaker consumption, inequality, wasted human capital
Evaluation	Duration, scale, regional concentration, benefit level, whether voluntary, state of the cycle

Evaluation toolkit

Use these judgement prompts in extended answers:

• Cause: which type of unemployment dominates in the context given?
• Time: demand-side policy can act within months, while retraining and mobility take years.
• Scale: is the problem a small frictional rate or a large cyclical gap?
• Distribution: are the jobless concentrated by region, age or industry?
• Trade-offs: cutting benefits may reduce unemployment but raises hardship; a lower minimum wage may add jobs but cuts pay.
• Conclusion: pick the policy that matches the main cause and say what would change your view.

Method in steps: classify a case

1. Is the person between jobs with suitable skills? Frictional.
2. Does demand fall every year at the same time? Seasonal.
3. Are there vacancies the unemployed cannot fill? Structural.
4. Is demand low across the whole economy? Cyclical.

Quick self-test

1. Country D has 9.5 million employed, 0.5 million unemployed and 3.0 million inactive. Calculate the unemployment rate and the activity rate.
2. Money wages rise 3% and prices rise 4.5%. Calculate the real wage change.
3. Ld = 500 - 10W and Ls = 100 + 10W. Calculate unemployment if W is held at 25.
4. Distinguish frictional from structural unemployment.
5. A region loses 50,000 jobs. Another has 30,000 vacancies, and 18,000 displaced workers can fill them. How many remain unemployed and how many vacancies are unfilled?
6. January unemployment rises by 85,000 and a typical January rise is 70,000. What is the seasonally adjusted change?
7. Which type of unemployment is linked to a negative output gap?
8. A natural rate rise moves LRAS which way, and why?
9. State two reasons why the claimant count may be below the LFS figure.
10. Calculate the fiscal cost of 0.8 million unemployed if each costs 7,500 pounds in benefits and 8,500 pounds in lost tax.

Answers

1. Rate = 0.5 / 10.0 = 5.0%. Activity rate = 10.0 / 13.0 = 76.9%.
2. 1.03 / 1.045 - 1 = -1.4% (a fall in the real wage).
3. Ld = 250, Ls = 350, so unemployment = 100 (thousand).
4. Frictional: skills match vacancies, but search takes time. Structural: skills or location do not match.
5. Unemployed = 50,000 - 18,000 = 32,000. Unfilled vacancies = 30,000 - 18,000 = 12,000.
6. 85,000 - 70,000 = 15,000.
7. Cyclical (demand-deficient) unemployment.
8. Left, because potential output falls when more of the labour force is structurally or frictionally out of work.
9. Some jobless people are ineligible, and some do not claim.
10. 0.8m x 16,000 = 12.8 billion pounds.

Where marks are usually lost

• Dividing by the population, not the labour force.
• Saying “unemployment fell” when the rate fell only because people left the labour force.
• Naming a type of unemployment without linking the cause to a matching policy.
• Describing the natural rate as zero.
• Explaining consequences for individuals only, when the question asks about the economy, or the reverse.
• Drawing a diagram but not labelling the axes, the curves or the equilibrium.
• Giving a one-sided answer with no judgement on cause, time period or scale.
• Forgetting to apply the answer to the context in the question.

Official syllabus

AQA AS and A-level Economics specification (7135 and 7136), first teaching from September 2015, version 1.3, published by AQA.