Cambridge International AS and A Level Economics: Employment, unemployment and labour mobility (9708)

This guide covers section 9.3 (Employment/unemployment), outcomes 9.3.1 to 9.3.7, of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 9 is A Level content only. It is not examined at AS, although the AS content on unemployment (section 4.5) is assumed knowledge. Every country, firm and number below is invented for illustration and is not a real statistic.

Track progress with the Cambridge A Level Economics hub and the printable checklist. Then use the revision notes and the practice questions. AS basics: unemployment and price stability; wage theory: labour demand, supply and wages. Not sure where to start? Try a free 10-minute diagnostic.

Outcomes in this unit

Outcome	Skill needed
9.3.1	Define full employment
9.3.2	Explain equilibrium and disequilibrium unemployment, including hysteresis
9.3.3	Distinguish voluntary from involuntary unemployment
9.3.4	Define the natural rate of unemployment, its determinants and policy implications
9.3.5	Interpret patterns and trends in employment and unemployment
9.3.6	Explain geographical and occupational mobility and the factors affecting them
9.3.7	Explain policies to reduce unemployment and assess their effectiveness

9.3.1: full employment

Full employment is the situation in which all those prepared and able to work at the prevailing wage can obtain a job. It does not mean zero unemployment. People still change jobs (frictional) and industries still decline (structural), so some unemployment remains at the full employment level of national income (see 9.1.3). Below that level there is a negative output gap and a deflationary gap.

Worked example 1. Country A has a labour force of 20.0 million and 1.3 million unemployed. Its natural rate is 4.5%.

Unemployment rate     = 1.3 ÷ 20.0 × 100 = 6.5%
Unemployed at full employment = 4.5% × 20.0m = 0.9 million
Cyclical (demand-deficient)   = 1.3 − 0.9 = 0.4 million = 2.0 percentage points

Full employment needs 0.4 million more jobs.

9.3.2: equilibrium and disequilibrium unemployment

Equilibrium unemployment exists when the labour market clears: the wage equates the quantity of labour demanded and supplied, yet some people are still unemployed. It includes frictional, structural and voluntary unemployment. Disequilibrium unemployment exists when the quantity of labour supplied exceeds the quantity demanded at the going wage. Two routes lead to it:

• Real-wage unemployment. The wage is held above its equilibrium level by a minimum wage, union bargaining or long contracts.
• Demand-deficient (cyclical) unemployment. Aggregate demand falls, firms cut output, and wages do not fall fast enough to restore balance.

Worked example 2. In a labour market, w is the wage in cu (currency units) per hour and quantities are in thousands of workers: demand L = 600 − 20w, supply L = 20w − 200.

Equilibrium: 600 − 20w = 20w − 200  →  w = 20, L = 200
Wage floor at 25: demand = 100, supply = 300
Disequilibrium unemployment = 300 − 100 = 200 thousand

Employment falls from 200 to 100 thousand (−50%) after a 25% rise in the wage. On a diagram with wage on the vertical axis, the floor at 25 lies above the crossing point of the curves, and the horizontal gap between supply and demand is unemployment.

Hysteresis is the persistence of unemployment after the shock that caused it has ended, because the shock has raised the equilibrium rate itself. The causes are skills that decay, lost contacts, employers treating a long gap as a warning sign, discouragement and “insider” workers who bargain only for themselves.

Worked example 3 (invented). The table shows actual and estimated natural rates in a country hit by a recession in year 2.

Year	Actual rate (%)	Estimated natural rate (%)	Gap (points)
1	4.0	4.0	0.0
2	9.0	4.0	5.0
3	7.5	5.0	2.5
4	6.5	5.5	1.0
5	6.0	6.0	0.0

By year 5 demand has recovered and the gap is closed, yet the rate is 2.0 points above year 1. Cyclical unemployment has become equilibrium unemployment. A deep recession therefore has lasting costs, which makes early action worthwhile.

9.3.3: voluntary and involuntary unemployment

Voluntary unemployment: a person chooses not to take a job at the going wage, for example because their reservation wage (the lowest pay they will accept) is above the wage on offer, or because they search longer for a better match. Involuntary unemployment: a person would accept work at the going wage, has the ability to do it, and still has no vacancy to fill.

In example 2 at the wage of 20 there is no involuntary unemployment. At the floor of 25, 200 thousand people want work at that wage and have none, so their unemployment is involuntary.

Worked example 4: a benefit comparison. A job pays 12 cu an hour for 30 hours a week, taxed at 20%. Out-of-work benefit is 180 cu a week.

Net weekly pay   = 12 × 30 × (1 − 0.20) = 288 cu
Replacement rate = 180 ÷ 288 × 100 = 62.5%
If benefit is cut to 150: 150 ÷ 288 = 52.1%

A higher replacement rate weakens the incentive to accept work and raises voluntary unemployment. Evaluation: the line is blurred. Refusing a very low-paid job may be rational, and benefits that allow a longer search can produce better matches.

9.3.4: the natural rate of unemployment

Definition. The natural rate of unemployment is the level of joblessness left once the labour market has cleared, so no demand-deficient unemployment is present. It consists of frictional, structural and voluntary unemployment.

Determinant	Effect on the natural rate
More generous or longer-lasting benefits	Raises it (longer search, fewer take low-paid jobs)
Strong unions, minimum wages, rigid contracts	Raises it (wages above market-clearing level)
Skills mismatch, weak training	Raises it (structural unemployment)
Poor information, low mobility	Raises it (frictional unemployment lasts longer)
Hysteresis after a long recession	Raises it
Flexible hiring and firing, effective job matching	Lowers it

Policy implications. The natural rate corresponds to the full employment level of output, shown as the long-run aggregate supply curve. If the government expands aggregate demand to push unemployment below the natural rate, output moves beyond potential, an inflationary gap opens and firms bid up wages and prices. The fall in unemployment is temporary. Only supply-side measures (9.3.7) that shift the natural rate can lower it durably.

Worked example 5. Country A has a labour force of 20.0 million. Training and job-matching reforms cut the natural rate from 6.0% to 4.5%.

Extra jobs   = (6.0% − 4.5%) × 20.0m = 0.3 million
Extra output = 0.3m × 45,000 cu per worker = 13.5 billion cu

9.3.5: patterns and trends

Read data in four ways: the unemployment rate, the employment rate (employed ÷ working-age population), the participation rate (labour force ÷ working-age population), and the breakdown by group (age, region, gender, duration).

Worked example 6. Country B has a working-age population of 25.0 million. Figures are in millions.

Year	Employed	Unemployed	Labour force	Unemployment rate	Employment rate	Participation rate
1	18.0	1.0	19.0	5.3%	72.0%	76.0%
2	18.2	1.1	19.3	5.7%	72.8%	77.2%
3	17.5	1.9	19.4	9.8%	70.0%	77.6%
4	17.6	1.8	19.4	9.3%	70.4%	77.6%
5	18.1	1.2	19.3	6.2%	72.4%	77.2%

Employment fell by 0.7 million (−3.8%) between years 2 and 3, and unemployment rose by about 70% in one year (1.1 to 1.9 million). By year 5 employment is above year 1, yet the rate (6.2%) is higher than in year 1 (5.3%). If 0.6 million of a youth labour force of 3.0 million are unemployed in year 3, the youth rate is 20.0%, about twice the national rate.

Causes of trends: the trade cycle (cyclical swings), structural change as employment moves from manufacturing to services, technology replacing routine tasks, globalisation shifting jobs between countries, demographic change, and policy. Unemployment is usually higher among young people, the low-skilled and declining regions. The rate hides discouraged workers who left the labour force, so compare it with the employment rate.

9.3.6: mobility of labour

Geographical mobility is the ability and willingness of workers to move to a different area for work. Occupational mobility is the ability to switch to a different type of job. Low mobility prolongs structural unemployment.

Factor	Geographical	Occupational
Cost	Housing prices and rents, moving and transport costs	Course fees and income lost while retraining
Skills and qualifications	Skills accepted elsewhere	Transferable skills, licences, entry requirements
Ties and information	Family, schools, community; knowledge of vacancies	Knowledge of other careers
Barriers	Immigration limits, language	Age, employer prejudice, professional bodies
Support	Relocation grants, social housing portability	Training grants, apprenticeships

Worked example 7. A worker can earn 4,500 cu a year more in another town, but pays 2,400 cu a year more in rent and 9,000 cu once to move.

Net annual gain = 4,500 − 2,400 = 2,100 cu
Payback period  = 9,000 ÷ 2,100 = 4.3 years

A worker expecting to stay two years will not move. A relocation grant of 4,200 cu cuts the payback to 2.3 years. For occupational mobility, a course costing 3,600 cu plus 8,000 cu of lost earnings gives 11,600 cu; against a 5,200 cu annual gain, payback is 2.2 years.

9.3.7: policies to reduce unemployment and their effectiveness

Policy	Targets	How it works	Limits
Expansionary fiscal or monetary policy	Cyclical	Higher AD raises output and demand for labour	Time lags, inflation, higher deficit, no help for structural
Education and training, apprenticeships	Structural	Raises skills and occupational mobility	Slow, costly, may not match employer needs
Lower benefits or time limits	Voluntary	Raises incentive to accept work	Poverty, weak demand, inequality
Lower labour taxes, wage subsidies	Structural	Cuts the cost of hiring	Cost to government, deadweight
Job-matching services	Frictional	Speeds search	Small effect on cyclical
Relocation grants, regional policy	Geographical	Lowers moving cost or brings jobs to regions	Expensive; may drain a region
Labour market flexibility	Real-wage	Lower wage floors and union power	Lower pay, insecurity

Worked example 8: fiscal stimulus. The government raises spending by 1.5 billion cu. The multiplier is 2, and output per extra worker is 50,000 cu.

Rise in national income = 1.5bn × 2 = 3.0 billion cu
Jobs created = 3.0bn ÷ 50,000 = 60,000

If cyclical unemployment is 150,000, this removes 40% of it and leaves the structural part untouched.

Worked example 9: cost per job. A training scheme costs 3,000 cu per trainee and 40% of trainees find a job they would not otherwise have found. Cost per additional job = 3,000 ÷ 0.40 = 7,500 cu. A wage subsidy costs 2,000 cu per subsidised job, but 25% of those jobs would have existed anyway, so the cost per additional job = 2,000 ÷ 0.75 = 2,667 cu. The subsidy is cheaper per job, but training may raise later productivity.

Evaluating effectiveness. Ask which type of unemployment. Demand-side policy suits cyclical unemployment but risks inflation when the economy is near full employment. Supply-side policy suits structural and frictional unemployment but works slowly and costs money. The multiplier, the length of the spell (hysteresis), the budget and labour market flexibility all matter. The best answer usually combines both kinds.

Common errors

• Defining full employment as zero unemployment.
• Dividing unemployment by the entire population when the labour force is the correct denominator.
• Treating hysteresis as any long spell: it is a rise in the equilibrium rate.
• Claiming demand-side policy can lower the natural rate permanently.
• Listing policies without saying which type of unemployment each tackles.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, section 9.3 Employment/unemployment (Cambridge University Press & Assessment).