OCR A Level Economics: Unemployment and employment (H460) – Revision Notes

These notes condense the Unemployment/Employment topic of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021, from the Economic policy objectives area of Component 2. All figures are invented and illustrative (Country B is made up). The whole specification is A Level. For reasoning and longer examples, return to the study guide. When you are ready, apply these notes in the practice set.

Also useful: OCR A Level Economics hub, printable checklist, the wider Macroeconomics revision notes, and the free diagnostics.

Definitions to recall

Term	Meaning
Employment	Paid work, including part-time work and self-employment
Unemployment	Without a job, actively seeking work and available to start
Economically inactive	Outside the labour force: neither in a job nor searching (for example full-time students, carers, retired people)
Labour force	Employed plus unemployed
Full employment objective	Everyone who wants and is able to work at the going wage can find work; only frictional and voluntary unemployment remain
Natural rate	Unemployment when the labour market is in equilibrium, with no cyclical unemployment
NAIRU	The rate at which inflation neither accelerates nor decelerates
Hysteresis	A spell of unemployment raises later unemployment, because skills fade and employers screen out the long-term jobless

Formulas

Measure	Formula
Unemployment rate	unemployed ÷ labour force × 100
Employment rate	employed ÷ working-age population × 100
Inactivity rate	inactive ÷ working-age population × 100
Share of a sector	sector jobs ÷ total jobs × 100
Unit labour cost growth	pay growth factor ÷ output-per-worker growth factor, minus 1
Fiscal cost of unemployment	number × (tax and contributions lost + benefits paid)

Worked reminder (Country B). Population aged 16 and over 30.0m; employed 19.2m; unemployed 0.8m.

• Labour force = 20.0m. Unemployment rate = 0.8 ÷ 20.0 = 4.0%.
• Employment rate = 19.2 ÷ 30.0 = 64.0%.
• Inactive = 30.0 − 20.0 = 10.0m, so inactivity rate = 33.3%.

Labour Force Survey versus claimant count

	LFS	Claimant count
Based on	Household survey	Benefit claims
Counts	Those who say they searched in the last four weeks and could start within two weeks	Those claiming unemployment-related benefits
Good for	International comparison, full coverage	Speed, local detail, low cost
Weak on	Sampling error, delay	Rule changes, non-claimants, some claimants not job-seeking

Worked reminder. Country B: LFS unemployed 0.80m, claimant count 0.55m. Gap = 0.25m, most plausibly jobless people who do not claim (savings, partner’s income) less claimants who are not job-seeking. A rule change alone can move the claimant count without any change in jobs.

Natural rate and NAIRU in steps

1. Natural rate = frictional + structural unemployment as a percentage of the labour force.
2. Cyclical unemployment = actual rate − natural rate.
3. Unemployment below NAIRU: labour shortages, wage rises, inflation accelerates.
4. Unemployment above NAIRU: slack, wage growth falls, inflation decelerates.

Worked reminder. Country B: frictional 0.25m, structural 0.35m, cyclical 0.20m.

• Natural rate = 0.60 ÷ 20.0 = 3.0%; cyclical = 0.20 ÷ 20.0 = 1.0%; total 4.0%.

Evaluate: NAIRU cannot be observed and shifts with skills, benefits, bargaining power and expectations. Supply-side policy lowers it; deep recessions can raise it through hysteresis.

Measurement difficulties

• Hidden unemployment: discouraged workers counted as inactive.
• Underemployment: part-timers wanting more hours counted as employed.
• Claimant count shifts with benefit rules; LFS has sampling error.
• Informal work, regional and group averages hiding detail, publication lags.

Worked reminder. Country B: 0.5m discouraged workers and 0.7m underemployed. Broader rate = (0.8 + 0.5) ÷ (20.0 + 0.5) = 6.3% against 4.0% headline. Underemployment = 0.7 ÷ 19.2 = 3.6% of those employed.

Causes: which type is it?

Cause	Type
Falling aggregate demand in a downturn	Cyclical
A closed industry in a region; skills no longer wanted; technology replacing tasks	Structural
Time to search and match	Frictional
Wages fixed above equilibrium by a union or legal floor	Real-wage
Holiday-season swings	Seasonal

Method for a cause question: name the type; explain the chain from cause to jobs; say who is affected and for how long; judge importance against the other causes.

Consequences: grouping and judging

• Individuals: income, health, skills, lasting scars.
• Firms: weaker demand, loss of trained staff, slightly lower wage pressure.
• Government: lost tax, higher benefits. Country B: 0.2m people × (£4,000 tax lost + £6,000 benefits) = £2.0bn.
• Economy and society: lost output and growth, inequality, regional decline, crime, family strain.

Judge by: duration, spread, cause, safety net, and whether the unemployment was cyclical (recoverable) or structural (persistent).

Pattern of employment

• Sector shift from primary and secondary to tertiary: income effects on demand, automation, trade.
• Contract shift: part-time, temporary, zero-hours, self-employment.
• Who works: rising female and older participation, migration.
• Consequences: structural unemployment, regional gaps, insecurity, productivity change.

Worked reminder. Country B services employment rises from 12.0m to 12.6m: +5.0%. If total employment rises from 18.4m to 19.2m, that is +4.3%, so services gain share.

Full employment

Gains	Risks
Higher output, tax receipts and incomes	Wage-push inflation above NAIRU
Lower benefit spending and poverty	Labour shortages and bottlenecks
Better wellbeing and skill use	Rising imports and a worse trade balance

Worked reminder. Country B pay up 3%, productivity up 2%: unit labour cost growth = 1.03 ÷ 1.02 − 1 = 0.98%. If pay rises 6% while productivity rises 2%, it is 3.9%, a clear inflation risk.

Policies matched to the type of unemployment

Type	Policy that fits	Limit
Cyclical	Expansionary fiscal or monetary policy to lift aggregate demand	Time lags, debt, inflation risk
Structural	Training, relocation help, regional investment	Slow, costly, uncertain take-up
Frictional	Job-matching services, better vacancy information	Small effect on the total
Real-wage	Wage restraint, labour market reform	Equity concerns, resistance

Evaluation toolkit

Use these prompts at the end of a paragraph to turn description into judgement:

• Size: is the effect large relative to the whole economy?
• Time: short run or long run, and how long does the unemployment last?
• Who: which groups and regions gain or lose?
• Alternatives: does another cause or policy matter more?
• Evidence: does the data supplied support the claim, and which measure was used?

Must-know distinctions

• Unemployed versus inactive.
• LFS (survey, ILO-style) versus claimant count (benefit records).
• Natural rate (labour market equilibrium) versus NAIRU (inflation-stable): often similar in value, different ideas.
• Cyclical (demand) versus structural (supply-side mismatch).
• Full employment versus zero unemployment.

Quick self-test

Using Country B (population 16+ 30.0m, employed 19.2m, unemployed 0.8m) unless told otherwise.

1. Define unemployment.
2. Calculate the labour force.
3. Calculate the unemployment rate.
4. Calculate the employment rate.
5. Why might a claimant count of 0.55m differ from an LFS figure of 0.80m?
6. With frictional 0.25m, structural 0.35m and cyclical 0.20m, find the natural rate.
7. Give two reasons the headline rate may understate spare capacity.
8. Calculate the fiscal cost if 0.2m people each lose £4,000 in tax paid and receive £6,000 in benefits.
9. State two causes of structural unemployment.
10. Pay rises 6% and productivity 2%. Find unit labour cost growth.
11. State two risks of running the economy below NAIRU.
12. Services jobs rise from 12.0m to 12.6m. Find the percentage change.

Answers

1. Without a job, actively seeking work and available to start.
2. 19.2 + 0.8 = 20.0m.
3. 0.8 ÷ 20.0 = 4.0%.
4. 19.2 ÷ 30.0 = 64.0%.
5. They count different things: the claimant count misses jobless people who do not claim, and may include claimants not seeking work. The gap here is 0.25m.
6. (0.25 + 0.35) ÷ 20.0 = 3.0%.
7. Discouraged workers counted as inactive; part-timers wanting more hours counted as employed.
8. 0.2m × £10,000 = £2.0bn.
9. Any two of: occupational immobility, geographical immobility, industry decline, technological change, skills mismatch.
10. 1.06 ÷ 1.02 − 1 = 3.9%.
11. Wage-push inflation, labour shortages or bottlenecks, higher imports.
12. 0.6 ÷ 12.0 = +5.0%.

Where marks are usually lost

• Using labour force when the denominator should be the working-age population, or the reverse.
• Counting students and carers as unemployed.
• Writing that full employment means nobody is out of work.
• Describing LFS and claimant count separately without a comparison.
• Giving a cause of unemployment without naming its type or the policy that fits it.
• Listing consequences for individuals only and ignoring government, firms and the economy.
• Drawing a conclusion with no judgement on duration, size or who is affected.
• Treating a fall in the claimant count as proof that employment has risen.
• Ignoring the data supplied and writing a general answer.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021.