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

This guide covers the Employment and unemployment sub-section of AQA A-level Economics (7136), taken 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 specification PDF prints the A-level version as 4.2.3.2). The specification lists this content within Economic performance, which it places in both Paper 2 and Paper 3 of the A-level.

All numbers below are invented and illustrative. Countries A and B do not exist. Use the AQA A-level Economics hub and the printable checklist to track progress, and the free diagnostics to find weak spots. Companion pages: revision notes and practice questions. For the AD/AS model see aggregate demand and supply; for wage determination see labour demand and supply.

What you must be able to do

Specification point	You should be able to
UK measures	Define and compare the claimant count and the Labour Force Survey measure
Voluntary and involuntary	Distinguish them using the labour market diagram
Four types	Explain seasonal, frictional, structural and cyclical unemployment
Demand- and supply-side factors	Explain how both affect employment and unemployment
Real wage unemployment	Explain the concept and what determines it
Natural rate	Explain the concept and its determinants
Consequences	Analyse effects on individuals and on economic performance
Link to output gap and LRAS	Connect a negative output gap to cyclical unemployment; show supply-side causes shifting LRAS

The specification adds that unemployment has a variety of causes, so the appropriate policy depends on the cause.

1. Measuring unemployment: claimant count v Labour Force Survey

The claimant count counts people claiming an unemployment-related benefit. It comes from administrative records, so it is quick and cheap. The Labour Force Survey (LFS) asks a sample of households about their activity. It uses the International Labour Organisation (ILO) definition: unemployed means without a job, available to start within two weeks, and having looked for work in the last four weeks.

	Claimant count	LFS measure
Source	Benefit records	Household survey
Who is counted	Those who claim	Those who meet the ILO test
Weakness	Misses jobless people who are ineligible or do not claim	Sampling error; estimates can be revised
Strength	Detailed by small area; timely	Internationally comparable

Worked example (Country A, illustrative, millions). Population aged 16 and over 42.00; employed 28.50; unemployed on the LFS test 1.50; economically inactive 12.00.

Labour force = 28.50 + 1.50 = 30.00
Unemployment rate = 1.50 / 30.00 x 100 = 5.0%
Activity rate = 30.00 / 42.00 x 100 = 71.4%
Claimant count = 1.05, so the gap to the LFS figure = 1.50 - 1.05 = 0.45

The gap arises because some jobless people are ineligible (for example, because of a partner’s income) or do not claim. A year later, employment is unchanged at 28.50, unemployment is 1.20 and inactivity is 12.30. The labour force is 29.70 and the rate is 1.20 / 29.70 = 4.0%. The rate fell although no job was created: 0.30 million left the labour force. Always ask whether a fall is real or a drop in participation. Hidden unemployment (discouraged workers, and part-timers wanting more hours) is missed by both measures.

2. Voluntary and involuntary unemployment

Voluntary unemployment: people choose not to take jobs available at the going wage, because the wage is below what they will accept, or because benefits make work less attractive. Involuntary unemployment: people willing and able to work at the going wage cannot find a job.

Labour market diagram in words: wage is on the vertical axis and quantity of labour on the horizontal axis. The upward-sloping labour supply curve (Ls) crosses the downward-sloping labour demand curve (Ld) at the equilibrium wage We and employment Le. At a wage W1 above We, firms demand La, which is less than Le, while workers supply Lb, which is more than Le. The horizontal distance from La to Lb is the unemployment at that wage.

Not everyone in that gap is the same. Those who would only work at wages above W1 are voluntarily out of work. Those between La and Lb are willing to work at W1 and cannot find jobs, so they are involuntarily unemployed. At We there is no involuntary unemployment, though some voluntary unemployment remains.

3. Seasonal, frictional, structural and cyclical

Type	Cause	Policy that fits
Seasonal	Regular yearly swings in demand (a seaside resort in winter)	Little; diversify local activity
Frictional	Time taken to search and match between jobs	Better job information; shorter benefit duration
Structural	Mismatch of skills or location after industries decline	Retraining, education, help to relocate
Cyclical (demand-deficient)	Fall in aggregate demand	Raise aggregate demand

Worked example (structural). A declining industry in one region sheds 90,000 jobs. A growing industry elsewhere has 60,000 vacancies. Only 45,000 of the displaced workers have the skills and can move.

Matched = 45,000
Still unemployed = 90,000 - 45,000 = 45,000
Unfilled vacancies = 60,000 - 45,000 = 15,000

Unemployment and vacancies coexist, which signals structural, not cyclical, unemployment. Raising demand would not solve it.

Seasonal data: suppose unemployment rises by 120,000 in January, and a January rise of 100,000 is normal. The seasonally adjusted rise is 20,000, so the underlying change is small.

4. Demand-side and supply-side factors

Labour demand is derived demand: firms hire because there is demand for their output. A fall in consumption, investment, government spending or net exports lowers aggregate demand, output and employment. These are the demand-side factors.

Supply-side factors affect the labour force and its ability to fill jobs: skills and education, geographical and occupational mobility, the level and duration of benefits, taxes on work, union power, minimum wages, regulation, and information about vacancies.

Policy implication: demand-side policy suits cyclical unemployment; supply-side policy suits structural, frictional and real wage unemployment.

5. Real wage unemployment

Real wage unemployment exists when the real wage is held above the level at which the labour market clears. The real wage is the money wage adjusted for prices.

Worked example (a local labour market, illustrative; hourly wage W in pounds, labour in thousands). Ld = 600 - 20W and Ls = 200 + 20W.

Equilibrium: 600 - 20W = 200 + 20W, so W = 10 and L = 400
At W = 12: Ld = 360, Ls = 440, unemployment = 80
Employment falls 400 to 360 = -10%; wage rises 20%; ratio = -0.5

The 80 splits into 40 who lose jobs (400 to 360) and 40 extra people attracted by the higher wage (440 - 400). Unemployment is larger when labour demand is more wage-elastic.

Determinants: trade union bargaining power; a statutory minimum wage set above equilibrium; money wages that rise but are slow to fall; benefits that raise the wage workers will accept; and labour productivity (low productivity means a given real wage is too high).

Real wage check: money wages rise 7% and prices rise 2%. Real wage growth is 1.07 / 1.02 - 1 = 4.9%. If productivity grows 1%, labour has become 1.049 / 1.01 - 1 = 3.9% dearer relative to output, which puts jobs at risk.

6. The natural rate, the output gap and LRAS

The natural rate of unemployment is the rate when the economy is at its productive potential: no cyclical unemployment, only frictional, structural and similar supply-side unemployment. It is not zero. Its determinants include benefit levels and duration, labour market flexibility, skills mismatch, immobility, union power, minimum wages and the speed of structural change.

A negative output gap means real GDP is below productive potential, and actual unemployment exceeds the natural rate: the excess is cyclical unemployment.

Worked example (Country B, illustrative). Labour force 30.0 million; natural rate 4.0%; output per worker 62,500 pounds (assumed constant).

Potential employment = 30.0 x 0.96 = 28.8 million
Potential output = 28.8m x 62,500 = 1,800 billion pounds
Actual output = 1,710 billion: gap = (1,710 - 1,800)/1,800 = -5.0%
Employment = 1,710bn / 62,500 = 27.36 million
Unemployed = 30.0 - 27.36 = 2.64 million = 8.8%
Cyclical = 28.8 - 27.36 = 1.44 million = 4.8 percentage points

AD/AS sketch: a fall in AD moves the economy to a point on short-run AS to the left of the vertical LRAS, at a lower price level. Output is below the LRAS position, there is a negative output gap and demand-deficient unemployment. Real output is Y1, below Yf.

Supply-side causes shift LRAS. If the natural rate rises from 4.0% to 5.5%, potential employment is 30.0 x 0.945 = 28.35 million and potential output is 28.35m x 62,500 = 1,771.9 billion pounds, 28.1 billion lower (-1.6%). LRAS shifts left. Policies that cut structural and frictional unemployment shift it right: a fall to 3.5% gives 1,809.4 billion (+0.5%). The standard LRAS curve is vertical at the economy’s normal capacity level of output; the Keynesian AS curve is covered on the AD/AS page.

7. Consequences of unemployment

For individuals: lost income and poverty; loss of skills and confidence, so re-employment gets harder; poorer mental and physical health; strain on families; social exclusion.

For the economy: lost output (resources are unused, so the economy is inside its production possibility frontier); lower tax receipts and higher benefit spending; weaker consumption and a downward multiplier effect; waste of the education already invested; greater inequality and regional decline; possible social costs.

Worked example (Country B, continued). Cyclical unemployment of 1.44 million, each costing 8,000 pounds in benefits and 9,000 pounds in lost tax.

Lost output = 1.44m x 62,500 = 90 billion pounds
Fiscal cost = 1.44m x 17,000 = 24.48 billion pounds

Evaluation: effects depend on duration, scale, who is affected and the generosity of benefits. Short frictional spells can help workers find a better match. Unemployment can also reduce wage pressure. Long-term unemployment does the most lasting damage and can raise the natural rate, because skills fade (an extension beyond the specification wording).

Common errors

• Calling the rate “unemployed divided by population” instead of dividing by the labour force.
• Treating a fall in the rate as proof of more jobs without checking participation.
• Using demand stimulus as the cure for structural unemployment.
• Drawing the natural rate as zero or saying it is “frictional only”.
• Mixing up cyclical (demand shortfall) and real wage (wage too high) unemployment.
• Listing consequences without linking each to output, tax, spending or inequality.

Exam technique

Questions reward AO1 knowledge, AO2 application to the context given, AO3 chains of analysis and AO4 evaluation. Name the type of unemployment, link the cause to the policy, then judge using time period, scale and cause.

Official syllabus

AQA AS and A-level Economics specification (7135 and 7136), first teaching from September 2015, version 1.3, published by AQA. This page follows the Employment and unemployment sub-section.