Unemployment and poverty
A factory in Waterford closes and 400 workers are told their jobs end on Friday. The headlines say "unemployment rises". But what exactly is being counted, who counts as unemployed, and what does it cost the workers, the town and the State? By the end of this page you will be able to answer all three.
Measuring unemployment
Not everyone without a job is "unemployed" in economics. The labour force is everyone aged 15 and over who is either employed or unemployed (without a job, available for work and actively looking for one). Full-time students, people caring for family at home and retired people are outside the labour force.
The CSO publishes the figure each month from the Labour Force Survey. A related measure is the participation rate: the share of the working-age population that is in the labour force.
Define the unemployment rate. A country has a labour force of 2,500,000 people, of whom 2,350,000 are employed. Calculate the unemployment rate.
Define the unemployment rate. A country has a labour force of 2,500,000 people, of whom 2,350,000 are employed. Calculate the unemployment rate.
In year 1, the labour force is 2.4 million and unemployment is 190,000. In year 2, the labour force is 2.5 million and unemployment is 150,000. a) Calculate the…
In year 1, the labour force is 2.4 million and unemployment is 190,000. In year 2, the labour force is 2.5 million and unemployment is 150,000.
- a) Calculate the unemployment rate in each year.
- b) Calculate the number of people employed in each year and the change.
- c) Explain why unemployment can fall while the labour force grows.
Types and causes of unemployment
Unemployment has different causes, and each needs a different remedy.
| Type | Cause | Example |
|---|---|---|
| Frictional | Time taken to match workers to jobs | A graduate searching for her first job |
| Structural | Skills or location of workers do not match available jobs; industries decline | A bank clerk whose job disappears due to online banking |
| Cyclical | Fall in aggregate demand in a recession | Firms cut output and staff during a downturn |
| Seasonal | Work depends on the time of year | A farm worker laid off after harvest; tourism staff in winter |
Cyclical unemployment is linked to the business cycle: it rises in a recession and falls in a boom. Structural unemployment can persist even in a boom, because the unemployed do not have the skills the new jobs need.
Match each of the following to a type of unemployment (frictional, structural, cyclical, seasonal): a) A graduate searching for her first job. b) A farm worker laid off…
Match each of the following to a type of unemployment (frictional, structural, cyclical, seasonal):
- a) A graduate searching for her first job.
- b) A farm worker laid off after the harvest.
- c) A fall in aggregate demand during a recession.
- d) A bank clerk whose job has disappeared due to online banking.
The costs of unemployment
Unemployment hurts the individual and the whole economy.
Economic costs
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Lost output: the economy produces less than it could (it is inside its production possibility frontier).
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Lost income for households, so lower consumption and aggregate demand.
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Higher government spending on jobseeker's payments and lower income tax, PRSI and USC receipts.
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Skills deteriorate the longer a person is out of work.
Social costs
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Poverty and a lower standard of living.
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Poorer physical and mental health, stress and loss of confidence.
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Family strain, and higher crime and social exclusion in some areas.
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Emigration of young, skilled people.
The loss does not stop there. The workers spend less in local shops, cafés and garages, so those businesses lose revenue and may cut jobs. This is the multiplier effect working in reverse: an initial fall in income leads to a larger fall in local income and output.
State three economic costs and three social costs of unemployment for individuals and for the economy.
State three economic costs and three social costs of unemployment for individuals and for the economy.
A firm closes a factory in Waterford, making 400 workers redundant. Each receives a jobseeker's payment of €220 a week and previously paid income tax of €90 a week. a)…
A firm closes a factory in Waterford, making 400 workers redundant. Each receives a jobseeker's payment of €220 a week and previously paid income tax of €90 a week.
- a) Calculate the weekly cost to the Exchequer of the closure (extra welfare plus lost tax).
- b) Calculate the annual cost over 52 weeks.
- c) Describe two further effects on the local economy via the multiplier.
Long-term unemployment and poverty
A person is long-term unemployed if they have been out of work for 12 months or more. This group faces the greatest risk of poverty.
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Income: jobseeker's payments are lower than typical wages, so household income falls sharply.
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Skills depreciation: skills and contacts fade and employers may see a long gap as a warning sign, so it becomes harder to get back to work.
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Intergenerational effects: children in jobless households may have lower educational attainment and fewer opportunities, so poverty can pass from one generation to the next.
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At risk of poverty: a person is "at risk of poverty" if their household's equivalised disposable income (income adjusted for household size) is below 60% of the national median. This is a relative measure, so it depends on how the rest of society is doing. The CSO (SILC survey) also reports consistent poverty: the share of people who are both at risk of poverty and experiencing enforced deprivation (for example, unable to afford adequate heating).
Policies to address it include education and training (for example, Further Education and Training courses and apprenticeships), active labour market programmes such as job-search support and work placements, and tax or payment incentives that make taking a job worthwhile.
Explain the link between long-term unemployment and poverty. In your answer, refer to income, skills depreciation, intergenerational effects and the "at risk of poverty"…
Explain the link between long-term unemployment and poverty. In your answer, refer to income, skills depreciation, intergenerational effects and the "at risk of poverty" concept. Outline two policies to address it.
Policies and evaluating the headline rate
The right policy depends on the type of unemployment.
| Type | Policy | Trade-off |
|---|---|---|
| Cyclical | Expansionary fiscal policy (more spending, lower taxes) to raise aggregate demand | Higher budget deficit and national debt; risk of inflation near full capacity |
| Structural | Education, retraining, apprenticeships, regional investment | Slow to work and costly; benefits arrive years later |
| Frictional | Better job information, job-matching services | Small effect; some frictional unemployment is healthy |
Higher unemployment benefits reduce poverty and support spending in a downturn (they act as an automatic stabiliser), but may weaken the incentive to look for work and cost more in public spending. The size of these effects depends on how generous the benefit is.
Why the headline rate can mislead
The unemployment rate counts only those actively seeking work. It can understate weakness because:
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Discouraged workers give up looking and leave the labour force.
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Emigration removes people who might otherwise be unemployed.
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Underemployment: people in part-time work who want full-time hours count as employed.
For an evaluation answer, weigh the evidence: the rate is useful, regularly published and comparable over time, but it ignores quality of jobs, hours, emigration and regional differences. It should be read alongside the participation rate, employment numbers and poverty indicators.
Evaluate policies that the Irish Government could use to reduce (i) cyclical unemployment and (ii) structural unemployment. In your answer, consider fiscal policy,…
Evaluate policies that the Irish Government could use to reduce (i) cyclical unemployment and (ii) structural unemployment. In your answer, consider fiscal policy, education and training, and active labour market programmes, and discuss the trade-offs with inflation and public finances.
The unemployment rate is 5%, but the participation rate has fallen and many workers have emigrated or become discouraged. a) Explain why the headline unemployment rate…
The unemployment rate is 5%, but the participation rate has fallen and many workers have emigrated or become discouraged.
- a) Explain why the headline unemployment rate may understate the true extent of labour market weakness.
- b) Calculate: labour force 2,000,000; unemployed 100,000. If 50,000 unemployed people become discouraged and leave the labour force, calculate the new unemployment rate.
- c) Discuss the usefulness of the unemployment rate as an indicator of economic wellbeing.
Discuss the extent to which a rise in unemployment benefits would affect (i) poverty rates, (ii) the incentive to seek work, (iii) aggregate demand and (iv) the public…
Discuss the extent to which a rise in unemployment benefits would affect (i) poverty rates, (ii) the incentive to seek work, (iii) aggregate demand and (iv) the public finances. Reach a reasoned conclusion on whether such a rise is desirable.
Back to the start: the Waterford closure raises unemployment by 400 people, costs the Exchequer about €124,000 a week, and cuts local spending through the reverse multiplier. Whether it deepens poverty depends on how long the workers stay out of work.
Summary
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Unemployment rate = unemployed ÷ labour force × 100; labour force = employed + unemployed.
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Four types: frictional, structural, cyclical and seasonal, each needing a different policy.
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Costs: lost output and income, higher welfare spending, lost tax revenue, and social harms such as poverty and poor health.
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Long-term unemployment raises poverty risk through lower income, skills depreciation and intergenerational effects.
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Policies: expansionary fiscal policy for cyclical, training and education for structural; always weigh the trade-offs with inflation and the public finances.
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The headline rate can understate weakness (discouraged workers, emigration, underemployment).