The labour force is the employed plus the unemployed. The unemployment rate divides the unemployed by the labour force, not by the whole population.
This lesson belongs to economic indicators. Where your textbook gives slightly different wording for a definition, use the wording your school teaches and check the method here.
Who is in which group?
Start with everyone of working age and sort each person into one of three groups. Employed people have a job. Unemployed people are without a job, available for work and looking for one. Everyone else is outside the labour force.
The first two groups together make the labour force. Only the labour force is the base for the unemployment rate.
Worked example: a fictional town
A fictional town has 2 000 residents of working age. Of these, 1 350 are employed and 150 are unemployed. The remaining 500 are 300 students, 150 full-time homemakers and 50 retired people.
- Labour force = 1 350 + 150 = 1 500.
- Unemployment rate = 150 ÷ 1 500 × 100 = 10%.
- Participation rate = 1 500 ÷ 2 000 × 100 = 75%.
Check that the groups add up: 1 350 + 150 + 500 = 2 000. A total that does not match the population means a person was counted twice or missed.
The mistake that costs marks
A typical slip is to divide the 150 unemployed by the 2 000 working-age people and report 7.5%. The working looks tidy, but the base is wrong, because students and homemakers are not looking for work.
The second slip is to treat the 500 people outside the labour force as unemployed, which would give 650 unemployed and a rate of 32.5% on a base that is also wrong. Write the definition of each group before any division.
| Step | Wrong | Right |
|---|---|---|
| Unemployed | 150 + 500 = 650 | 150 |
| Base | Working-age population | Labour force, 1 500 |
| Rate | 7.5% or 32.5% | 10% |
Which type of unemployment is it?
A rate gives the size. The type gives the cause. The syllabus separates four types, and each needs one feature that sets it apart.
| Situation in a fictional town | Type | The feature |
|---|---|---|
| A graduate spends two months searching for a first job | Frictional | Short search between jobs |
| A bakery closes because machines replace the work, and its workers lack the new skills | Structural | Skills or location do not match available jobs |
| Shops cut staff because demand in the whole economy has fallen | Cyclical | Linked to a fall in total demand |
| Fruit pickers are not needed after the harvest ends | Seasonal | Linked to the time of year |
Check yourself
A fictional district has 4 000 residents of working age. There are 2 400 employed, 200 unemployed and the rest outside the labour force. Find the unemployment rate and the participation rate.
Next, 100 of the unemployed stop looking for work and leave the labour force. Find both rates again and explain what happened.
Answer
Outside the labour force: 4 000 − 2 400 − 200 = 1 400. Labour force = 2 600.
Unemployment rate = 200 ÷ 2 600 × 100 = 7.7% (7.69 to one decimal place). Participation rate = 2 600 ÷ 4 000 × 100 = 65%.
After 100 stop looking: unemployed = 100, labour force = 2 500. Unemployment rate = 100 ÷ 2 500 × 100 = 4%. Participation rate = 2 500 ÷ 4 000 × 100 = 62.5%.
The rate fell, yet employment is still 2 400. No new jobs were created. The rate fell because people left the labour force, which the falling participation rate shows.
What to study next
Continue with reading growth indicators, or go to explaining why a rate can fall while the underlying level still rises for the same base thinking in a different setting. Then use the indicators practice set.
If you want a teacher to go through these groups with your own examples, see online one-to-one Economics tuition.