External environment - Economic indicators

Theory 1 - Unemployment - what is it and why is it important?

It sounds like it ought to be obvious to measure unemployment - you just count the number of people unemployed and that is the figure. Well yes, sort of! However, the definition of unemployment is people who are not currently working, but who are willing to work. This means that just counting those who claim benefits for unemployment might not be the best way to work out the figure. There may be people who are claiming benefits, but have no intention of working. There may be people who are desperately looking for work, but are not entitled to benefits - they wouldn't get counted.

For these reasons, there are two main measures of unemployment:

1. Claimant count
   This counts the number of people unemployed and claiming benefits on a certain day each month. This gives an indication of how many people are unemployed but can be an inaccurate measure for the reasons given above.
2. Labour force survey
   This is the method that is currently used to measure unemployment. It is based on a survey of the workforce and is generally considered to be a more accurate reflection of the number of people unemployed. It is also a more consistent measure internationally and so is easier to compare with other countries.

Causes of unemployment

Unemployment may be caused by factors on the demand-side of the economy or on the supply-side. The main demand-side cause is simply that there isn't enough demand in the economy to employ everyone. If there is not enough demand for their product, firms will lay off staff and this will increase unemployment. Those unemployed will spend even less and this may cause demand to fall further still.

Supply-side factors causing unemployment may be things like a lack of mobility. There may be a shortage of skilled staff in one area of the country and a surplus in another, but if people are unwilling to move (or unable to move because of house prices or other reasons) then the unemployment will remain. This is called geographical immobility. Unemployment could also be caused by a skills gap, or perhaps an associated lack of training. It may even be caused by wages being forced too high, therefore increasing firms' costs.