Cambridge International as and a level Economics Ebook

Full employment: 
the level of employment corresponding 
to where all who wish to work have found jobs, excluding 
frictional unemployment.
Natural rate of unemployment: 
the rate of 
unemployment that exists when the aggregate demand for 
labour equals the aggregate supply of labour at current wage 
rate and price level.
KEY TERMS
While monetarists argue that the natural rate of 
unemployment cannot be reduced, in the long run, by 
expansionary monetary or fi scal policy, it can change 
over time. Th
e factors that determine the natural rate 
of unemployment are supply side factors. Over time the 
natural rate of unemployment may fall as a result of:
■ 
an increase in the mobility of labour
■ 
an improvement in the education and training levels of 
workers
■ 
a reduction in trade union restrictive practices
■ 
a reduction in state unemployment benefits
■ 
a cut in income tax.
TOP TIP
Be careful to avoid confusing the economically inactive 
and the unemployed. The economically inactive are not 
part of the labour force whereas the unemployed are.
The causes of unemployment
Unemployment can be divided into three main types: 
frictional, structural and cyclical. Each of these types has 
diff erent causes.
SELF-ASSESSMENT TASK 
9.13
Th
e UK’s productivity gap with its main rivals 
increased in 2013. Output per worker hour in the 
UK was 21% lower than the average for the other 
six members of the G7 – the US, Germany, France, 
Italy, Japan and Canada. On an alternative measure, 
output per worker, the gap was even wider at 25%.
Low productivity can restrict economic growth 
and so limit economic growth. Productivity would 
be expected to grow over time because of new 
technology and better skills but the UK’s productivity 
remained stagnant between 2011 and 2013.