Unemployment: measures, types and effects

The ILO measure and the claimant count, calculating the unemployment rate, cyclical, structural, frictional and seasonal unemployment and its costs.

UK unemployment: 4.7%.

In June to August 2026, 1.71 million people in the UK were unemployed: 4.7% of the labour force, down from 5.2% at the turn of the year, which had been the highest for about five years. The ONS has warned that its Labour Force Survey has had smaller samples in recent years, so the figures are less certain than they used to be.

Who counts as unemployed, and why does it matter which kind of unemployment it is?

Source: Office for National Statistics, Labour market overview, UK (October 2026).

Measuring unemployment.

Unemployed (ILO definition): people aged 16 and over without a job who have looked for work in the past four weeks and can start within two weeks, or who are waiting to start a job. It is measured by the Labour Force Survey, a survey of households.

The claimant count measures people claiming unemployment-related benefits. It can be higher or lower: not everyone who is unemployed can claim or chooses to, and under Universal Credit some people in low-paid work are counted.

The labour force (economically active) is the employed plus the unemployed. People who are neither, such as students, carers and the long-term sick, are economically inactive.

Unemployment rate = unemployed ÷ labour force × 100

Why people are unemployed.

• Cyclical (demand-deficient): too little AD in a downturn. Falls when the economy recovers.
• Structural: a mismatch of skills or location after the structure of the economy changes, such as the decline of shipbuilding and coal or automation. Can last for years.
• Frictional: short spells between jobs while people search. Some is normal and healthy.
• Seasonal: work that only exists at certain times of year, such as tourism, farming or retail at Christmas.
• Real-wage (classical): wages held above the level that clears the labour market, for example by a minimum wage or strong unions, so more people want work than firms want to hire.

The type matters because each needs a different policy: cyclical calls for more AD; structural needs retraining or help to move; frictional needs better job information.

Think first

A factory closes because cheaper imports have taken its market.

Its skilled machinists find there are no jobs nearby that use their skills, though other jobs are available elsewhere.

What kind of unemployment is this?

Structural unemployment comes from a mismatch between workers’ skills or location and the jobs available, often after an industry declines. It can last a long time, because workers need retraining or to move.

Step by step

1. The economy at full capacity: real GDP on LRAS. Some unemployment always exists even here, as people move between jobs.

   Check: A full-time student who is not looking for work is:

   They are neither working nor looking for work, so they are outside the labour force.

2. Now AD falls, perhaps from a loss of confidence or higher interest rates. Output falls below potential: a negative output gap. Firms need fewer workers, so they lay people off. This is cyclical, or demand-deficient, unemployment.

3. The costs of unemployment fall on many. The unemployed lose income and may lose skills, confidence and health. Firms lose demand. The government receives less tax and pays more in benefits. The economy loses output it could have produced: it is inside its PPF.

   Check: Which policy would best reduce structural unemployment?

   Structural unemployment is a skills or location mismatch; more AD does not give people the skills employers want.

A common mistake

A fall in AD causes cyclical (demand-deficient) unemployment. Structural unemployment comes from a mismatch of skills or location, not from too little demand.

Exam question

Explain the difference between cyclical and structural unemployment.

Model answer

Cyclical, or demand-deficient, unemployment is caused by a fall in aggregate demand in a downturn. Firms sell less, so they cut output and need fewer workers. It tends to fall again when the economy recovers and AD rises.

[Diagram: AD falls from AD1 to AD2, creating a negative output gap below LRAS.]

Structural unemployment is caused by a mismatch between the skills or location of workers and the jobs available. It follows long-term changes in the structure of the economy, such as the decline of an industry or automation. For example, workers from a closed factory may lack the skills employers elsewhere need. It can last for years, even when the economy is growing.

The difference matters for policy: cyclical unemployment can be reduced by boosting AD, while structural unemployment needs supply-side measures such as retraining or help to move.

However, the two are linked: if cyclical unemployment lasts a long time, people out of work lose skills and contacts and may become structurally unemployed, so how long a downturn lasts matters as well as how deep it is.