Economic Growth, Unemployment and Inflation: Question 4

Worked solution

Part (a): The Labour Force Survey unemployment rate

The unemployment rate is the number unemployed expressed as a percentage of the labour force (employed plus unemployed):

$\text{Unemployment rate} = \frac{\text{Unemployed}}{\text{Labour force}}\times100 = \frac{1{,}500{,}000}{25{,}000{,}000}\times100 = 6\%$

Kelvara’s Labour Force Survey unemployment rate is $6\%$.

Part (b): The claimant count unemployment rate, and why it differs

Using the same labour force as the denominator:

$\text{Claimant count rate} = \frac{900{,}000}{25{,}000{,}000}\times100 = 3.6\%$

This claimant count rate of $3.6\%$ is lower than the Labour Force Survey rate of $6\%$. The Labour Force Survey counts anyone who is without work, available for work and actively seeking work, based on a household survey. This definition can include people who are genuinely unemployed but do not receive unemployment-related benefit. Common reasons include: not meeting the eligibility conditions for benefit (for example because of a partner’s income, savings, or insufficient prior contributions), having used up a time-limited benefit entitlement, or simply choosing not to claim. Because the claimant count only records people actually registered and receiving benefit, it misses these people, so it produces a smaller figure than the Labour Force Survey.

Part (c): Consequences of unemployment

For government finances: higher unemployment raises government spending on unemployment-related benefits and other welfare support, while at the same time reducing revenue from income tax and social-insurance contributions, since people who are unemployed earn no taxable income. Together, higher spending and lower tax revenue push the government’s budget further into deficit (or reduce any surplus), for a given level of tax rates and spending on everything else.

For an unemployed individual: losing earned income directly reduces their living standards and ability to meet everyday costs. If unemployment continues for a long period, the individual can also experience a loss of relevant skills and work habits (sometimes called hysteresis), which can reduce their chances of finding a new job and may lower their future earning potential even after they do find work again.

Final answers

• (a) Labour Force Survey unemployment rate $=$ $6\%$
• (b) Claimant count unemployment rate $=$ $3.6\%$, lower because many Labour Force Survey unemployed do not claim or qualify for benefit
• (c) Government finances: higher benefit spending and lower tax revenue, worsening the budget position. Individual: lower living standards and possible loss of skills/work habits over a long spell of unemployment