Unemployment and economic inactivity: a distinction that changes the numbers

Overview

Economic inactivity and explain how it differs from unemployment, discouraged worker and rise in economic inactivity reduce the economy's productive potential.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   Define economic inactivity and explain how it differs from unemployment.

   Model answer

   The economically inactive are people of working age who are neither in work nor meeting the conditions to be counted as unemployed, meaning they are not both actively seeking work and available to start. The unemployed are outside employment but inside the labour force because they are searching; the inactive are outside the labour force altogether. The distinction is search behaviour, not willingness to work in principle.

2. 2

   Into which of the three labour market categories does a full-time university student who is not looking for work fall, and why?

   Model answer

   Economically inactive. The student is of working age and is not in paid employment, but is not actively seeking work and would not be available to start immediately, so neither condition for unemployment is met. If the same student took a part-time job of any number of hours they would be reclassified as employed, and if they began applying for jobs while available to start they would be reclassified as unemployed.

3. 3

   Which groups make up the economically inactive?

   Model answer

   Students in full-time education, people with long-term sickness or disability that prevents them working, those caring full-time for children or for relatives, people who have retired before state pension age, and discouraged workers who want a job but have stopped looking because they believe none is available. The groups are very different from one another in whether they would work if circumstances changed, which is why the total is a poor guide to spare labour capacity on its own.

4. 4

   What is a discouraged worker, and why does this group complicate the interpretation of unemployment figures?

   Model answer

   A discouraged worker wants a job but has stopped searching because they believe none is available to them. Because they are not searching, they fail the ILO test and are recorded as inactive rather than unemployed, so they vanish from the unemployment figures. The complication is that they represent genuine unused labour, and their numbers rise during downturns, so the measured unemployment rate understates the problem exactly when the problem is worst.

5. 5

   Why can the unemployment rate fall while the number of people in work is unchanged?

   Model answer

   The unemployment rate is the unemployed divided by the labour force, and both the numerator and the denominator fall when an unemployed person becomes inactive. With 1.4 million unemployed in a labour force of 33.2 million the rate is 4.2 per cent; if 200,000 stop searching, the rate becomes 1.2 divided by 33.0, which is 3.6 per cent. Employment has not changed at all, so the improvement in the headline rate is entirely a reclassification.

6. 6

   Why does a rise in economic inactivity reduce the economy's productive potential?

   Model answer

   Potential output depends on the quantity of factors available for production, and labour that has left the labour force is not available to firms however strong demand becomes. A higher inactivity rate therefore shifts the long-run aggregate supply curve to the left, or restrains its rightward movement, lowering the level of output the economy can sustain without inflation. It also reduces the tax base while often raising the demands on the benefit and health systems.

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