Unemployment and the Labour Force: Their Affect on the Economy

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Unemployment and the Labour Force:
Their Affect On the Economy

This essay looks at how the level of unemployment (or employment) and labour force participation affect the economy as a whole.

For the purpose of this essay I will concentrate more on unemployment, as this adversely affects the size of the labour force, whereas labour force participation does not affect the level of unemployment in the same manner. In reality, the two work hand in hand and it is vital that they both retain an aspect of stability for a successful economy.

From a macroeconomic perspective, we can first look at the following equation:

AE = C + I + G + X –M

With the letters meaning Aggregate Expenditure, Consumption, Investment, Exports, and Imports respectively (Samuelson and Nordhaus, 1995).

Assuming that the country runs in a ‘normal’ fashion being affected by the business cycle and fiscal and monetary policy, we can look at the fact that a high level of unemployment is going the dramatically affect national output, and also affect all of the before mentioned factors in the equation above due to knock on effects. This being said, we can examine how unemployment arises and the word itself in a more analytical fashion.

Unemployment Defined

The ‘Collins Dictionary of Economics’ (Pass, 2000) defines unemployment as: ‘Inability to obtain a job when one is willing or able to work. According to Sloman and Suctchliffe, (2001) this can be measured in two ways: official registration with a state agency, which carries some form of income support, and self-assessment by a random sample of the population…’ This is the most basic part of the definition, but is enough for us to understand and evaluate the topic at hand.

The Labour Force Survey

The ‘Labour Force Survey’ is the primary method used when obtaining national statistics on unemployment. According to Bosworth, Dawkins, and Stromback, (1996) the Survey divides the population into two groups. These are:

1. The WORKING-AGE Population which is the number of people aged between sixteen years of age and retirement who are not in jail, hospital, or some other form of institutional care. This group then forms the general group for those who are physically and mentally able to work. This group is then sub-divided into ‘The Economically active or workforce’ and the ‘Economically inactive’. 2. Others. This group is basically anyone who does not fall into the ‘working-age population.

To analyze these different types of people that fall into unemployment and help us understand and answer the question at hand, it is necessary to look at the different types of unemployment that these people fall into.

Types of Unemployment

The first Ison, (2000) distinguishes ‘Frictional Unemployment’. This occurs during normal market turnover and arises from the creation and destruction of jobs.

The second is ‘Structural Unemployment’. This arises from changes in technology and foreign competition. The foreign competition affects the ‘skills and location match between job workers’.

The third, and final type of unemployment is ‘cyclical unemployment’. This is tied in with the business cycle and is therefore caused by fluctuations in it. A good example of this would be the unemployment created due to a recession.

The fourth is ‘seasonal unemployment’. This occurs due to particular jobs that are based on the seasons in the year. A good example of this would be a ski instructor.


The unemployment rate measurement is very effective most of the time, however, it does have its flaws; therefore it is not perfect. This is firstly because the unemployment rate does not include discouraged workers. A discouraged worker is someone who is available for work and unemployed, but has simply given up the will to find work (Blundell and Walker, 1986) Secondly, the unemployment rate calculates the number of unemployed persons, and not the number of unemployed labour hours. It...
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