3.2.3.2 - Employment and unemployment

Measuring unemployment

An unemployment measure counts a defined group, so a falling headline rate needs careful interpretation.

The Labour Force Survey (LFS) estimates employment, unemployment and economic inactivity using internationally agreed definitions. As set out in the ONS labour-market guide, an unemployed person is without a job, has actively sought work in the previous four weeks and is available to start within two weeks; the definition also includes someone who has found a job and is waiting to start within two weeks. Economically inactive people are neither employed nor unemployed under these definitions: examples include some students, carers and people unable to work through illness. Inactivity does not mean someone has no desire ever to work.

The claimant count uses administrative records of people claiming unemployment-related benefits, including Jobseeker's Allowance and Universal Credit claimants required to seek work. It differs from LFS unemployment because eligibility and benefit rules differ from survey definitions. Some unemployed people do not claim; some claimants may do limited paid work while remaining subject to work-search conditions. Changes in benefit coverage or requirements can change the claimant count without an equivalent change in underlying unemployment. Neither series is automatically the “true” number for every purpose.

The unemployment rate uses the economically active population as its denominator:

In an illustrative economy, 18 million employed plus 2 million unemployed gives a rate of 10%. If 1 million unemployed people become inactive, with employment still 18 million, unemployment falls to 1 million and the rate becomes $1/19\times100\approx5.26\%$. The fall is not evidence that a million jobs were created. Population changes also mean employment and unemployment can rise together.

Read employment, inactivity, hours and vacancies alongside unemployment. Someone can count as employed while wanting more hours or using few of their skills: underemployment is not fully captured by the unemployment rate. Survey sampling error, non-response, changing population estimates and revisions also affect comparisons, while administrative data are sensitive to rule changes. Use consistent definitions and periods, and treat small changes cautiously.

The ONS December 2020 labour-market bulletin explains that workers temporarily absent on furlough were classified as employed under the international definition. The UK's Coronavirus Job Retention Scheme supported employment during the pandemic. This dated example shows why employment status and hours actually worked can give different pictures of a shock; it does not imply that furlough is a current policy.

Types and causes of unemployment

Types of unemployment identify mechanisms; they are not labels that automatically tell us whether a worker chose to be jobless.

Voluntary unemployment describes people who choose not to accept available work at the prevailing wage and conditions. Involuntary unemployment describes people willing and able to work at the prevailing wage who cannot obtain a job. The LFS operational definition is different from this theoretical distinction: both voluntary job-searchers and involuntarily unemployed people can meet its search and availability tests.

A worker dismissed when a plant closes may face both structural mismatch and cyclical weakness in the local economy. A frictionally unemployed worker might have left voluntarily, or might be searching after an involuntary redundancy. A seasonal worker may want year-round work but be unable to find it. Do not equate all frictional or seasonal unemployment with voluntary unemployment.

Employment depends on both sides of the economy. Stronger product demand encourages firms to hire, but training, health, transport, childcare, wage incentives and matching affect whether suitable workers are available. Labour demand is derived from demand for output: this microeconomic mechanism connects the labour-market model to aggregate demand and the cycle.