2.1.3 - Employment and unemployment

Measuring Unemployment

Counting unemployment is harder than it first appears. Two people may both be out of work, but only one will count as unemployed if the other is not actively seeking work or is unavailable to start. That is why the UK uses more than one measure.

The claimant count is useful because it comes from administrative data and can be published quickly. However, it is narrow. Some people who want work are not eligible to claim, while others do not claim even if they might qualify. That means the claimant count can underestimate the true level of unemployment. Since Universal Credit, it also includes some people in low-paid work who are required to look for more hours, so it is not a pure count of the unemployed either.

The Labour Force Survey uses the International Labour Organisation approach, so it aims to count people who are without a job, have actively looked for work in the past four weeks, and are available to start within the next two weeks. This makes it broader than the claimant count and more useful for international comparisons. The drawback is that it depends on survey responses rather than a complete set of benefit records.

Both measures have limitations. The claimant count can change because benefit rules, sanctions, or willingness to claim change, even if underlying labour-market conditions have not improved. It also misses unemployed people who want work but are not eligible for benefits, choose not to claim because of stigma, or are put off by administrative barriers. That is one reason it is useful for tracking benefit pressure but weaker as a complete measure of labour-market slack.

The Labour Force Survey is broader, but it is still an estimate based on a sample rather than an exact count of every household. That means it can be affected by sampling error, misunderstanding of survey questions, inaccurate responses, and later revisions. In 2023, for example, falling response rates led the ONS to delay LFS releases and warn that its estimates were less reliable. It may also be less timely than administrative data. And even the LFS does not fully settle the wider question of labour-market health on its own, because inactivity, underemployment, and informal work can all rise even when the headline unemployment rate looks better.

Economists usually prefer the Labour Force Survey when they want a fuller picture of labour-market conditions. Policymakers still watch the claimant count because it is timely and closely linked to pressure on the benefits system. In practice, the strongest judgement uses both measures alongside inactivity and underemployment rather than relying on one figure alone.

Reading Labour-Market Data

The unemployment figure only makes sense when compared with other labour-market measures. The employment rate is the proportion of the working-age population in work. The unemployment rate is the proportion of the labour force that is unemployed, not the proportion of the whole population. The inactivity rate measures the share of working-age people who are neither in work nor actively seeking work.

The unemployment rate is calculated as (unemployed ÷ labour force) × 100, while the employment and inactivity rates are calculated against the working-age population. For example, imagine a working-age population of 40 million: 30 million employed, 1.5 million unemployed and 8.5 million inactive. The employment rate is 30 ÷ 40 = 75%, and the inactivity rate is 8.5 ÷ 40 = 21.25%. The labour force is 30 + 1.5 = 31.5 million, so the unemployment rate is 1.5 ÷ 31.5 ≈ 4.8%.

That distinction matters because the labour force includes only the employed and the unemployed. If discouraged workers stop searching for jobs, they move out of unemployment and into inactivity. The unemployment rate may then fall even though the labour market has not really become stronger. In the example, if 0.3 million unemployed people give up searching, unemployment falls to 1.2 million and the labour force to 31.2 million, so the unemployment rate falls to about 3.8% even though nobody has found a job. The employment rate stays at 75%, while the inactivity rate rises to 22%. The reverse can also happen: if the labour force grows, through population growth, migration or more people looking for work, employment and unemployment can both rise at the same time. A rising employment rate alongside a falling unemployment rate is the clearest sign of genuine improvement.

Economically inactive people can include students, carers, early retirees, the long-term sick, and discouraged workers. A rise in inactivity can reduce the size of the labour force and lower the economy's productive potential. If people stay out of the labour market for a long time, their skills may fade and re-entry becomes harder.

Underemployment shows why falling unemployment is not always the same as a healthy labour market. A qualified engineer working part-time in a cafe, or a worker on a zero-hours contract who wants full-time hours, is employed but still underused. Official unemployment can fall while a lot of labour-market slack remains hidden.

Types of Unemployment

Unemployment is not one single problem. Different causes create different policy responses, so economists need to classify unemployment carefully.

Structural unemployment often appears after long-term changes in the economy. The decline of UK coal mining, shipbuilding, and some traditional manufacturing left workers in places where the old jobs had gone but the new jobs required different skills. This is made worse by occupational immobility, where workers do not have the transferable skills needed in growing sectors, and geographical immobility, where people cannot easily move because of housing costs, family ties, or weak transport links. Globalisation and technological change can deepen the problem, so structural unemployment is often long term.