Advantages to Investing in Real Estate Investment Trusts
In the previous article we studies about what Real Estate Investment Trusts (REITs) are. We also understood that they have become remarkably popular in a very short span of time and that they have a place in virtually every portfolio in the United States. We also learned that this trend is fast spreading across the […]
Proptech: The Future of Real Estate
The rise of the internet and mobile technology has fundamentally changed the way we live. All sectors of the economy have been greatly impacted by this internet boom. Real estate sector has been one of the laggards when it comes to this technological adoption. However, of late, proptech has become a buzzword in the startup […]
Economic Benefits of Immigration and how to Manage Flow of Migrants
Recent Developments in Europe In recent months, the world has witnessed unprecedented flows of refugees and migrants from the conflict zones in the Middle East towards the West where these refugees plan to begin a new life in countries in Europe as well as the United States. While there has been much opposition to the […]
Universal Basic Income: An Idea Whose Time Has Come ?
Introduction: The History of Universal Basic Income (UBI) In recent months, there has been much discussion worldwide about a concept or an idea known as Universal Basic Income or UBI. This term that captures the provision of a basic income to all citizens of a country irrespective of their income or nature of work is […]
Linear Regression Model – Prerequisites, Case Study, Goodness-of-Fit
Suppose you are an HR professional and want to determine: Whether age of an employee has a substantial effect on their maturity The importance of experience and capability on remuneration The importance of IQ (Intelligence Quotient) vs. EQ (Emotional Quotient) on problem handling capability How sedentary lifestyle at workplace affects employee output If a specific […]
The definition of unemployment provided us with some insight as to how the statistics are different than what an uninformed person would expect them to be. In this article, we will have a step by step look at how the unemployment rate for any country is calculated. Every country has its own mechanism of calculating the unemployment rate. However, these mechanisms are very similar to each other and have their roots in very same method described below.
We know that the unemployment rate is a ratio. This means that it is nothing but a numerator divided by the denominator. The numerator is the number of unemployed people. However, what is used as the denominator can have a huge impact on the unemployment rate. The government does not use the entire population in the denominator. Instead, it uses a sub set of the entire population in the denominator. It is for this reason that we need to have a good look at the subsets.
This is the entire population of any country. It includes every citizen i.e. right from a newborn baby to a very old person. For obvious reasons, this is not an appropriate number to base the calculation of unemployment rate upon. If this number was used as the denominator, then the government would be held accountable as to why babies, old people and sick people are not being employed! That would be a bizarre situation.
Hence, to get rid of the above mentioned issue, governments reduce the number of people who are not eligible to work from the calculation. This includes children under the age of 16 or 18 depending upon the country. It also includes senior citizens i.e. people above the age of 60 or 65 depending upon the country. It is ironical that most government around the world tax the incomes generated by senior citizens. However, none of them take the accountability of providing them with a job of needed. In reality, a lot of senior citizens do work because of financial constraints or personal free will. They are simply omitted from the calculation. Also, they are the group that is the worst hit, in case, the unemployment rate goes down!
The next category of people, that are excluded from the calculation are the people that the government believes are not interested in working. This category could include people who wish to live off the estate that has been left to them by their ancestors. Also, the most common category of people included here are housewives and students. The types and number of people that are excluded from the calculation based on this pretext are under serious scrutiny. For instance, most economists around the world agree to the fact that the wrong kind of people are filtered out at this stage. The best example of this would be the famous “discouraged worker” flaw which will be discussed in the forthcoming articles.
Hence, once we exclude the people who cannot work and the people who do not wish to work from the total population, we reach a number called the labor force. This number is of paramount importance when it comes to unemployment statistics. This is because almost all of these statistics use this number as their denominator. This the number that the government must take accountability for meaning that the government must theoretically ensure that as many of these people find jobs as possible.
This brings us to an important statistic pertaining to the unemployment rates i.e. called the labor force participation rates. The labor force participation rate is an intermediary statistic that is calculated to reach the denominator that will be used in the calculation. For instance, if the labor force participation rate is 75%, then the government is only considering 75% of the population when it declares the official unemployment rate.
The last subset is that of unemployed people. These are people who the government, based on their subjective definition, considers to be able and willing to work. These people form the numerator in the ratio. Also, this number is an estimate based on a survey and hence is prone to errors. Thus, the final two sub-sets which are used in the equation are labor force and unemployed people. The criticisms of the unemployment rate are based on the issue of what is excluded from the calculation.
In the next article, we will have a look at how to interpret the unemployment numbers like an expert. However, for the moment, it is important to realize that the unemployment rate is not the “be all end all” statistic. The correct picture only emerges only after both the labor force participation rate as well as the unemployment rate is seen in tandem.
Your email address will not be published. Required fields are marked *
