Measuring Unemployment

08.12.2017 |

Episode #7 of the course Fundamentals of economics by Dr. Michael McDonald


While governments work diligently to grow national wealth and the economic success of the population as a whole, GDP is not the only metric that matters when considering economic policy. Another equally important and studied statistic is the unemployment rate, which we will explore today.


What Is Unemployment?

For the average lay person, thinking about an unemployment rate sounds straightforward: We might simply measure the proportion of the total population that does not have a job. The reality is much more complex.

In particular, we need a way to distinguish between different types of people without jobs. Many people who do not have jobs are “unemployed” by choice. This could include, among others: elderly people, children, parents taking care of children while a spouse works, etc. Having very few children who work regular jobs is not an indication of an economic problem—if anything, in modern wealth nations, not having children working is seen as desirable and enabling education.

Instead, when we talk about unemployment, we are generally referring to workers who are not working or not working full time but would like to. So, a key requirement for being considered “unemployed” is that an individual must be actively looking for a job. Governments survey the population to help determine the proportion of people looking for a job versus those who are not working by choice.

Unemployment rates vary around the world, based on the economic condition and structure of the labor market, but they can range from as little at 4% to 10% or more.

In recent years, the US and European economies saw high levels of unemployment after the 2008 Financial Crisis, but those levels have dropped off dramatically in the decade since the Recession. US unemployment at the end of 2017 has been slightly above 4%. Some European countries continue to struggle with high levels of unemployment following the recession, even a decade later.


Labor Force Participation and Discouraged Workers

Overall, the fraction of the population that is employed is called the labor force participation rate. Labor force participation rates vary by country based on the level of economic development, but high and persistent unemployment leads to a drop off in labor force participation. If workers lose their jobs and are unable to find new ones, they may eventually become discouraged and stop looking for work. These people are not considered unemployed—to be unemployed, a person must be actively looking for work. This, in turn, reduces labor force participation and undermines economic growth. As a general example, in the US, the labor force participation rate averaged 63% between 1963 and 2017.


When Unemployment Is Actually Good

Despite the negative connotation of the word unemployed, some unemployment is actually a good thing for an economy. In fact, economists often refer to the concept of the natural rate of unemployment to convey this idea.

While not having a job can be scary for many people, it is also an important component in a healthy economy. Some workers leave jobs to look for better or higher paying ones, while other workers leave jobs to move different geographic areas or seek employment in new industries. Having a small pool of unemployed workers in the general population also gives companies a source of potential workers to hire as they grow. Overall, low levels of unemployment (of 5% or less) are actually an important indicator of a healthy and robust economy.

Tomorrow, we will start learning what actions governments can take to help spur an economy that is underperforming.


Recommended book

Rise of the Robots: Technology and the Threat of a Jobless Future by Martin Ford


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