Explaining The Unemployment Rate: Facts and Myths

 


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To the layperson the unemployment rate may be one of the most misunderstood economic indices. The unemployment rate is not a measure of the percentage of people that do not have a job. It is a measure of the percentage of the labor force that doesn’t have a job but are actively looking for work. So, if the unemployment rate is quoted as 5 percent, it does not mean that 95 out of every 100 people are working. It could mean, for example, that out of every 100 people, 60 are working, 35 are not working and don't want to be working, and 5 are not working but are actively looking for employment. That’s the key; someone must be actively looking for work to be listed as unemployed in the index. This article explains some of the facts and myths about the unemployment rate.

Is the unemployment rate accurate? The unemployment rate cannot be completely accurate and there are plenty of reasons for that.

Take unemployment insurance for example. Unemployment insurance was set up as a safety net to provide protection for people that lose their jobs and fall on hard times. One of the conditions of receiving benefits from unemployment insurance is that you must be actively looking for a job. People may become lazy and dependant on the benefits and this may induce some people to stay unemployed but pretend that they are looking for a job. These people would, incorrectly, be included in the unemployment rate statistics, which would inflate the rate.

On the other hand, some people are unemployed, are not actively looking for work, but would accept a job would one become available. This may happen if they had been actively looking for work but were unsuccessful; this could discourage them and cause them to voluntarily withdraw from the labor force.

The unemployment rate does not measure the amount of people that are “underemployed. " Let's say someone works a part time job that offers 15 hours of work per week but this person needs a full time job in order to make ends meet. Let's say he is working this part time job only because it is all that he could find. This person would be considered “employed" yet he really is “underemployed. " So, the unemployment rate cannot be an exact measure of the employed work force in the economy.

To conclude, the unemployment rate will never be an exact measure but it is still a useful index. The most useful aspect of the index is that it shows the general direction of the unemployment rate. Comparing it over months or years can show the general employment trend and can show the direction of changes in unemployment. That is what the unemployment rate should be used to show. You cannot use any single month of statistics on its own.

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