How is unemployment measured and what are its different types and costs?
Define and measure unemployment and the participation rate, distinguish the types of unemployment, explain the concept of full employment and the NAIRU, and analyse the costs of unemployment
WACE Year 12 Economics Unit 4 on unemployment: how the ABS measures the unemployment and participation rates, the types of unemployment, the meaning of full employment and the NAIRU, and the economic and social costs of unemployment.
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What this dot point is asking
SCSA wants you to define and calculate the unemployment and participation rates, distinguish the types, explain full employment and the NAIRU, and analyse the costs. Expect a labour-force calculation and a short or extended response.
Measuring unemployment
The ABS measures these monthly through the labour force survey. Note that working even one hour counts as employed, which is why economists also track underemployment (people who want more hours) and the hidden unemployed (discouraged job-seekers who have stopped looking and so are not counted).
Types of unemployment
- Cyclical (demand-deficient): caused by a downturn in the business cycle when aggregate demand is too low. This is the type policy stimulus targets.
- Structural: a mismatch between the skills or location of workers and the jobs available, often caused by technological change or industry decline.
- Frictional: short-term unemployment as people move between jobs.
- Seasonal: tied to seasonal patterns such as harvests and holiday retail.
- Hard-core and long-term: people who face persistent barriers to employment.
Full employment and the NAIRU
Full employment does not mean zero unemployment, because frictional and structural unemployment always exist even in a strong economy.
Pushing unemployment below the NAIRU through demand stimulus tends to generate wage and price inflation, which is why the RBA cannot aim for zero unemployment. Estimates of Australia's NAIRU have been revised down over time toward the low-to-mid 4 percent range.
Costs of unemployment
- Lost output: the economy produces below capacity, forgoing goods and services permanently.
- Lower incomes and living standards for the unemployed and their families.
- Higher budget cost: more welfare spending and less tax revenue.
- Social costs: poorer physical and mental health, family stress, crime and erosion of skills (hysteresis), where long spells of unemployment make workers permanently less employable.
Exam-style practice questions
Practice questions written in the style of SCSA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
WACE 20236 marksAn economy has a working-age population of 20 million, a labour force of 13 million and 0.65 million unemployed. Calculate the unemployment rate and the participation rate, and explain why the unemployment rate alone can understate labour market slack.Show worked answer →
A 6 mark response needs both calculations and the slack point.
Unemployment rate. percent.
Participation rate. percent.
Understated slack. The headline rate counts anyone who worked even one hour as employed, so it omits underemployment (people who want more hours). It also omits the hidden unemployed (discouraged workers who have stopped looking and so leave the labour force), which can make the unemployment rate fall even when slack remains. Reading it alongside participation and underemployment gives a truer picture.
Markers reward both correct calculations and at least two reasons (underemployment, hidden unemployed) the headline rate understates slack.
WACE 20228 marksDistinguish between the main types of unemployment and analyse the economic and social costs of high unemployment.Show worked answer →
An 8 mark response needs the types and the costs.
Types. Cyclical (demand-deficient, from a downturn, the target of stimulus); structural (skills or location mismatch from technological change or industry decline); frictional (short-term, between jobs); and seasonal (tied to seasonal patterns). Long-term and hard-core unemployment reflect persistent barriers.
Economic costs. Lost output as the economy produces below capacity, lower incomes for the unemployed, and a higher budget cost (more welfare spending, less tax revenue).
Social costs. Poorer physical and mental health, family stress, and erosion of skills (hysteresis), where long spells make workers permanently less employable, raising structural unemployment.
Markers reward at least three types correctly distinguished and both economic and social costs.