What is Unemployment ? - Definition of Unemployment

The detailed study of any subject must always start by understanding the definition of the subject at hand. This is because the definition has profound implications on the way the study of the subject is conducted. The study of unemployment is a classic example of this case. We often come across unemployment statistics which are stated in the newspaper and make certain assumptions. However, in this article we will have a closer look at the definition of unemployment and see why the assumptions could be wrong.

Definition

The official definition of unemployment is as follows:

Unemployment occurs when a person who is a participant of the labor force and is actively searching for employment is unable to find a job.

Now, we need to pay attention to two points here. Firstly, the unemployment rate is calculated based on the labor force and not on the entire population. Therefore the average person’s interpretation of the unemployment rate can be wrong in the following manner:

Wrong Interpretation

The average person is likely to believe that the unemployment rate is stated as a percentage of the entire population. The common interpretation of the unemployment rate is that if the rate is at 5%, then 5% of the population of the country is unemployed.

Right Interpretation

The correct interpretation actually depends on the labor force and not the entire population. Hence, if the labor force forms 80% of the entire population then 5% of those 80% people are unemployed.

What’s wrong With Labor Force ?

Firstly, labor force is a subset of the entire population. Hence, if 80% of people are present in the labor force, the statistics simply ignore what is happening to the other 20%. It is possible that some or all of them are unemployed. However, that is not what is relevant as far as compiling the unemployment statistics is concerned.

Secondly, the labor force rate has been under scrutiny in the recent past. Critics argue that the labor force has been defined in such a way that willing workers can also get excluded from the labor force. This creates a biased small subset which is then used by the government to project favorable unemployment rates to the public.

Lastly, if the definition of the labor force changes in any period, it will render any comparison impossible. If the data of 2014 is based on a certain definition of labor force and that of 2015 is based on a certain different definition, then any comparison or analysis conducted based on these number is baseless! Moreover, giving governments power to change the labor force rate is like giving them power to simply change the unemployment rate!

Consensus vs. Survey

Another common misinterpretation is that the unemployment rate is calculated based on data collected from the entire population. Anyone familiar with any kinds of statistics will tell you that this is simply not possible.

For instance, the population of the United States is 340 million. Collecting and collating data from all of these 340 million people is a time and resource consuming task. Hence, the US government collects data from 60,000 households. These households are randomly selected by a computer and then statistical methods are applied to adjust the data collected from these households to represent the true unemployment rate of the entire population.

Therefore, it must once again be noted that there is a possibility of statistical error here. The unemployment rate of 5% stated above is an estimate based on the data provided by these 60,000 households. The true unemployment rate of the population could be larger or smaller.

Reconciling Using Welfare Records

There are many countries around the world which pay welfare benefits to the unemployed in the form of an unemployment allowance. Whether or not this is the correct thing to do morally or does it benefit the economy is a completely different issue.

However, for the purpose of calculation of the unemployment rate, the data generated by the welfare records can be extremely valuable. For instance, if 5% of the United States workforce is unemployed, then roughly 5% of the workforce should collect unemployment benefits. If the number of people collecting the benefits is significantly smaller or larger than the unemployment rate calculated by the government, then the flaw in the approach can be pointed out.

Conclusion

To sum it all up, there is more to what meets the eye when it comes to government statistics pertaining to unemployment rates. Hence, a common sense approach of simply making conclusions based on the face value of these numbers is incorrect. In reality, one needs to be educated about the intricacies of these numbers to truly know what they represent and how they can be manipulated to suit political agendas if required.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.