Cambridge IGCSE Economics: Employment and unemployment (0455)

This guide teaches section 4.7 of the Cambridge IGCSE Economics (0455) syllabus for examination in 2026: what employment and unemployment mean, how the pattern of jobs changes, how unemployment is measured, its three types, its consequences and the policies that reduce it. The syllabus is not tiered, so everyone studies all of it. All the countries and numbers in the examples are made up, so none of them is real data.

Related pages: revision notes, practice questions, the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics. For the policy tools in detail, see the pages on fiscal and monetary policy and supply-side policy.

What you must be able to do

Section	Outcome
4.7.1	Define employment, unemployment and full employment
4.7.2	Explain changes in the pattern and level of employment: a larger tertiary sector and formal economy, more women in the labour force, a falling public-sector share
4.7.3	Describe the claimant count and the labour force survey; use the unemployment-rate formula
4.7.4	Distinguish frictional, structural and cyclical unemployment
4.7.5	Explain the consequences of unemployment for individuals, firms and the whole economy
4.7.6	Describe policies to reduce unemployment and judge how effective they might be

4.7.1 Definitions

• Employment: people doing paid work, either for an employer or for themselves.
• Unemployment: people without a job who are able and willing to work and are actively looking for it at the going wage.
• Labour force (working population): the employed plus the unemployed.
• Full employment: everyone who wants a job at the going wage can find one. It does not mean zero unemployment, because people moving between jobs are always counted.

Three groups are outside the labour force, so they are never counted as unemployed: full-time students, people who have retired, and people who choose not to look for work, such as a full-time carer.

4.7.2 Changing patterns and level of employment

Employment moves between sectors as an economy develops. The table is for a made-up country, Country C.

Share of employment (%)	Year 1	Year 2	Year 3
Primary	55	35	15
Secondary	15	25	25
Tertiary	30	40	60

Each column adds to 100. Tertiary workers (retail, banking, teaching, transport, health) rose from 30% to 60%. If total employment is 8,000,000 in year 3, tertiary employment is 0.60 x 8,000,000 = 4,800,000.

Why the tertiary share rises

1. As incomes rise, households spend a growing share on services such as restaurants, travel and education.
2. Machinery raises output per farm worker, so fewer workers are needed in the primary sector and they move to other jobs.
3. Firms in every sector buy more banking, insurance, transport and advertising.

Why the formal economy grows. The formal economy covers jobs in registered businesses, with contracts and taxes recorded. In Country C, 3,200,000 of 8,000,000 workers (40%) are formal in year 1 and 5,600,000 (70%) in year 2. Reasons: bigger firms replace small informal traders, better education lets people qualify for formal jobs, and government enforces registration, which also raises its tax revenue.

Why more women join the labour force. Social attitudes change, so work outside the home is more accepted. More girls complete education, laws can ban discrimination, families are often smaller, and many households want a second income. In Country C, women are 28% of a 10,000,000-strong labour force (2,800,000) in year 1 and 41% (4,100,000) in year 3.

Why the public-sector share falls. As a country moves towards a market economy, the government sells state-owned firms (privatisation) and cuts its role in producing goods. Private firms then employ a bigger share. In Country C, the public sector employs 1,500,000 of 5,000,000 formal workers (30%) before reform and 600,000 (12%) after.

The level of employment also changes. It rises when output grows and firms need more workers, and falls in a recession.

4.7.3 Measurement of unemployment

Unemployment rate (%) = unemployed / labour force x 100, where labour force = employed + unemployed.

Worked example. Country A has 9,120,000 employed and 480,000 unemployed in year 1, then 9,200,000 and 690,000 in year 2.

Year 1: labour force = 9,120,000 + 480,000 = 9,600,000
        rate = 480,000 / 9,600,000 x 100 = 5.0%
Year 2: labour force = 9,200,000 + 690,000 = 9,890,000
        rate = 690,000 / 9,890,000 x 100 = 6.98%, so 7.0% to 1 d.p.

Employment rose by 80,000 yet unemployment rose, because the labour force grew by 290,000. More people entered the labour force than found jobs.

Two measures

	Claimant count	Labour force survey
Who is counted	People claiming unemployment benefit	People who say, in a sample survey, that they have no job and are looking for one
Source	Government records	Questions put to a sample of households, scaled up to the whole population
Strength	Cheap, quick, no sampling error	Includes people who do not claim; follows one definition, so comparable between countries
Weakness	Misses people not entitled to benefit or who do not claim; may include some who work in the informal economy	Costs more; results depend on sample size and honest answers

Worked example. In Country B, the claimant count is 310,000. A survey finds 1,000 unemployed among 20,000 sampled people in the labour force: 1,000 / 20,000 = 5%. The labour force is 8,200,000, so the survey estimate is 0.05 x 8,200,000 = 410,000. The 100,000 gap suggests people who want work but receive no benefit, such as those who have exhausted their entitlement.

4.7.4 Causes and types of unemployment

Type	Cause	Example
Frictional	Time taken to move between jobs; poor information about vacancies	A graduate searching for a first post
Structural	Decline of an industry; skills or location of the unemployed do not match vacancies (occupational or geographical immobility); new technology replaces workers	A mill closes after cheaper imports arrive and its weavers lack skills for new jobs
Cyclical	Fall in total demand in a recession, so firms cut output and staff	Factory lay-offs when consumers cut spending

The chain for cyclical unemployment: total demand falls, firms sell less, output falls, firms need fewer workers, they sell stock and cut jobs. It is also called demand-deficient unemployment.

Worked example. In Country D, the labour force is 10,000,000 and unemployment is 600,000: frictional 120,000, structural 210,000, cyclical 270,000.

Total rate = 600,000 / 10,000,000 x 100 = 6.0%
Cyclical share = 270,000 / 600,000 x 100 = 45%
If the recovery removed all cyclical unemployment:
  unemployed = 120,000 + 210,000 = 330,000, rate = 3.3%

A 3.3% rate with no cyclical unemployment shows what remains when demand is strong: frictional and structural unemployment, which need different policies.

4.7.5 Consequences of unemployment

For	Costs	Possible benefit
The individual	Lower income and living standards; stress and poorer health; skills and confidence decline the longer the spell lasts, making re-employment harder	Time to retrain or search for a better match
Firms	Lower consumer spending cuts sales and profit; skilled workers who leave may not return	Large pool of labour makes hiring easy and holds down wage demands
The economy	Lost output (the economy operates inside its production possibility curve); lower tax revenue and higher benefit spending; wider income inequality; social problems such as crime	Little; falling wage pressure may reduce inflation

Worked example. Country D’s unemployment rises by 150,000. Each unemployed person pays 2,400 less tax and receives 3,600 in benefit, and a worker produces 20,000 of output a year (all in invented currency units).

Fiscal cost = 150,000 x (2,400 + 3,600) = 900,000,000
Output lost = 150,000 x 20,000 = 3,000,000,000

The government loses 900 million of budget balance, and the economy loses 3 billion of goods and services. The second figure is the opportunity cost of unused labour.

4.7.6 Policies to reduce unemployment

Match the policy to the type, or it will not work.

Type	Policy	How it works
Cyclical	Expansionary fiscal policy (cut taxes, raise government spending); lower interest rates	Raises total demand, so firms hire
Structural	Education, training and retraining; apprenticeships; help with moving costs; subsidies or enterprise zones for depressed regions	Aligns skills and location with vacancies
Frictional	Job centres and online vacancy databases; benefits that run for a limited time	Shortens the search

Worked example (demand). Country D’s government raises spending by 400 million. The multiplier is 1.5, and an extra 40,000 of output needs one extra worker (assumption).

Rise in income = 400,000,000 x 1.5 = 600,000,000
Jobs created = 600,000,000 / 40,000 = 15,000
New rate: (600,000 - 15,000) / 10,000,000 x 100 = 5.85%

Worked example (training). A scheme trains 20,000 people at 6,000 each: 120,000,000 in total. If 55% find work, 11,000 gain jobs, a cost of 120,000,000 / 11,000 = 10,909 per job. The spending policy cost about 26,667 per job (400,000,000 / 15,000), but it works through a different route and the numbers are not like-for-like.

Judging effectiveness. Look at:

• Fit with the cause. Extra spending does little for a weaver with no modern skills.
• Time lag. Training takes months or years; a tax cut acts faster but only if firms feel demand rising.
• Cost. Spending and tax cuts widen the budget deficit; training diverts money from other uses.
• Side effects. Near full capacity, more demand can raise prices rather than output.
• Willingness. Workers must take part and move; some will not.
• Scale and timing. A small scheme in a big recession does little.

A good evaluation concludes which policy suits the dominant type of unemployment and says what would change your view.

Common errors

• Counting retired people, students or full-time carers as unemployed.
• Dividing unemployment by the population, or by employment, instead of the labour force.
• Saying full employment means nobody is unemployed.
• Describing the claimant count as a survey, or the labour force survey as benefit records.
• Offering a stimulus for structural unemployment without explaining why skills would match vacancies.
• Listing consequences without saying who they affect.

Official syllabus

Source: Cambridge IGCSE Economics (0455) syllabus for examination in 2026, version 2, Cambridge University Press & Assessment (Cambridge International), section 4.7.