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Measures of Unemployment

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Economics

Measuring unemployment may seem like a simple task. However, it is a lot more complicated than it seems. Would a person qualified as an engineer but working as a sales assistant be qualified as under-unemployed?

Measuring unemployment is important as this indicates to the government the level of labour market slack and the risk of inflation.

The unemployed refers to those who are willing and able to work at the going wage but can’t find a job despite actively searching for it.

This article explores the two main measures of unemployment in the UK: the Claimant Count and the Labour Force Survey.

The unemployment rate

The unemployment rate refers to the number of people who are out of work as a percentage of the labour force.

The labour force includes people who are employed (working) and people of working age who are unemployed (not working but seeking work). This excludes children, retired people, adult students, anyone who can’t work due to disability or illness, and those who are unwilling to work.

To learn more about the different types of unemployment check our explanation on Unemployment.

The rate of unemployment is useful to make comparisons between countries with different population sizes.

We can measure unemployment as either a number or a percentage. When we're talking about the unemployment rate though, we use a percentage.

This is the formula:

The unemployment rate helps in the estimation of the number of unemployed people. It is simply an average over the entire population and it doesn’t give a detailed report on the differences in unemployment amongst different population groups. These differences include region, ethnic group, gender, age occupation, and educational attainment.

How to measure unemployment

As we mentioned above, other ways in which unemployment is measured in the UK is using the Claimant Count measure and the Labour Force Survey measure.

The Claimant count

The Claimant count records the number of people who are unemployed and seeking government welfare benefits or unemployment benefits (such as Job Seekers Allowance (JSA) and Universal Credit) and who can prove that they are actively looking for work.

There are two types of JSA benefit schemes in the UK:

  • Contribution-based JSA, which is available to those who have paid two years of NI contributions, regardless of savings and income, for up to six months.
  • Income-based JSA is paid exclusively to those on low incomes and with low savings, regardless of the contributions made, so long as income is not too high.

Advantages of the Claimant count

  • It is a relatively easy method to collect data. It requires counting the number of people claiming JSA, and it is considered cost-effective as there is no cost in collecting the data.
  • It can be updated very regularly as the systems in place are all computerised, which serves to ensure a more accurate representation of the level of unemployment.
  • It is easy to understand.

Disadvantages of the Claimant count

  • It is not a reliable indicator of unemployment due to frequent policy changes in terms of who is eligible for benefits.
  • It generally underestimates the real number of unemployed people, as not everyone claims unemployment benefits, either for personal reasons or because the requirements placed by the government do not permit them.
  • Some people might claim benefits fraudulently while working in the ‘black market’ or ‘hidden’ economy.
  • It is not useful when making international comparisons, as different countries have different claimant requirements.

The Labour Force Survey (UK unemployment rate)

The official measure of unemployment in the UK is the Labour Force Survey which is used to discover the unemployment rate in a country or region. The sample of the survey are 40,000 households who are asked whether they are employed, unemployed, or economically inactive.

In order for a person the be classified as being unemployed, they need to be either:

1. Without a job, wanting a job, have actively sought work in the last four weeks, and available to work within the next two weeks.

2. Out of work, have found a job, and are waiting to start it in the next two weeks.

It is relevant to note that unemployment rates differ by region no matter the rate as a country. For example, in spite of its high population and the fact that it is the capital, London still has a high rate of unemployment in relation to other parts of the UK, including Scotland and Wales.

Advantages of the Labour Force Survey

  • It is more accurate because it is a survey sent around the country. Real people collect the data instead of machines.
  • It is an internationally accepted measure of unemployment, and thus international comparisons are more valid (as the definition is standardised).

Disadvantages of the Labour Force Survey

  • It is expensive and time-consuming to run, and thus it’s only updated annually.
  • Like other surveys, there is the likelihood that the sample doesn’t represent the entire population appropriately.
  • The monthly estimates are not as accurate as the full, quarterly result, which means they must be revised when the quarterly figures are known.
  • Additional administrative resources are required, aside from those related to measuring and administering welfare claims.

Difficulties in measuring unemployment

The unemployment rate is one of the most widely reported measures of economic activity and is used as an indicator of economic performance. However, there are still problems for attaining an accurate measurement of unemployment.

The first problem is hidden unemployment. Official statistics tend to underestimate the true level of unemployment in a country. Different types of people are caught on this web. For instance, ‘discouraged workers’ or unemployed workers who give up looking for jobs are not counted as ‘unemployed’ as they are not ‘actively looking for work’. However, they had searched for work before they dropped out of the labour force.

Another way in which the hidden economy is not recognised is that unemployment figures do not distinguish between those who are fully employed and those who are part-time workers. Unemployment figures see them as the same irrespective of the fact the part-time workers are underemployed. Furthermore, there is no distinction in terms of the type of work. This means that someone who is highly trained and qualified and is working as a waiter would be classed as fully employed.

A person who retired early in spite of being willing to work, or someone unable to work after having lost their jobs but who is undergoing retraining programs wouldn’t be included in the unemployment figures.

On the other side, there is a possibility of overestimating unemployment based on official statistics as the figures obtained in the surveys do not include those working in the hidden/informal economy. This includes people working in the unregistered portion of the economy, that is legally unregulated and not reported to tax authorities.

In addition, the calculation of the unemployment rate is flawed by the fact that the differences in unemployment amongst demographics in the population are not taken into account. Within a nation, unemployment may differ by region, gender, ethnic group, age, occupation, and educational attainment. Using measures that take this into consideration would enable a more accurate representation and report on unemployment in a country.

The effects of unemployment on the economy

When there are high levels of unemployment in a country, this bears both social and economic costs on the economy.

The economic costs of unemployment

The economic problems include:

  • Loss of real output (real GDP). Unemployment in itself is an opportunity cost to the economy as there is lost output that workers could have produced if they had been employed. This also potentially reduces production possibilities in the economy.
  • A loss to government income (less tax revenue and more unemployment benefits). The fact that the government then allocates money into unemployment benefits is another opportunity cost, as that money could have been used for something else that could better the economy, such as investment in education and healthcare. Furthermore, the economy would experience a reduction in revenue as along with government spending on benefits, people are paying less taxes.
  • More unequal income distribution. Whilst some unemployed people become poorer, some employed people are still able to obtain their income and get richer. In situations where certain demographics of the population are already hit by high levels of unemployment, this would serve to worsen their situation by increasing income inequalities and contributing to higher levels of poverty.
  • Unemployment can also affect companies and corporations because there are fewer people willing and able to afford the products they sell. This results in weaker demand.
  • Difficulty finding work. The longer people are unemployed, the more difficult it gets to find stable work in the future. This is liable to the propensity of workers to lose their skills after many years of being inactive in the field they were once specialised in. This situation can also be called erosion of human capital.

The social costs of unemployment

The personal and social problems associated with unemployment include the following:

  • Personal problems. High rates of unemployment indicate that the economy is not doing well, and unemployment impacts people’s standards of living. Unemployment leads to lower personal income, coupled with the likelihood of unemployed people carrying on lots of debt, experiencing family tensions related to finances, and developing unhealthy habits which can result in having poor physical and mental health.
  • Greater social problems. High levels of unemployment may result in further external costs to the economy and country such as increased crime, alcoholism, and vandalism. These can also be termed as negative externalities.

Check out our explanation to learn more about the different types of Externalities.

Government measures to reduce unemployment

Governments usually take both supply-side and demand-side policy measures to tackle unemployment.

To learn more about the supply-side policies to reduce unemployment check our explanation on the Natural Rate of Unemployment.

The demand-side policies are designed to increase aggregate demand (AD) and to shift the AD curve to the right (without rising inflation).

Monetary policy

The use of expansionary monetary policy to reduce unemployment aims to increase aggregate demand and GDP (economic growth). This can be done in the form of cutting interests rates, which would encourage borrowing, which in turn enables people to spend and invest more. Improving credit supply to businesses leads the loan finance to grow and take on more workers. Furthermore, lowered interest rates will reduce exchange rates and make an economy’s exports more internationally competitive.

Depreciation of exchange rate

Engineering a fall in the exchange rate of the UK Pound against the US Dollar would make British exporters of goods and services more competitive in overseas markets. When the Pound depreciates against the dollar, it makes it more expensive to import into the UK, whilst making it cheaper to export. In theory, this would bring about substitution effects where there is a fall in the demand for imports whilst the demand for exports expands. This should represent an expansion of monetary policy and has the potential to increase the total level of domestic employment (while also increasing domestic output (GDP) and reducing trade deficit). Nevertheless, it is relevant to note that the UK operates a free market economy and so the government isn’t likely to manipulate the exchange rate.

Fiscal policy

Expansionary fiscal policy is used to decrease unemployment by increasing AD and the rate of economic growth by increasing government spending and reducing tax rates. By lowering the rate of taxation, people are left with higher levels of disposable income and able to increase consumption, which leads to higher aggregate demand and higher gross domestic product. As a response to increasing GDP, companies would look to employ more people, and with infrastructure investment projects the government would decide to grant subsidies to businesses looking to take on long-term unemployed people.

Measures of Unemployment - Key takeaways

  • The unemployed refers to those who are willing and able to work at the going wage but cannot find a job despite actively searching for one.
  • The unemployment rate differs from unemployment itself as it is a percentage of the labour force who are unemployed.
  • The two measures of unemployment used in the UK are the Claimant count and the Labour Force Survey. Between the two, the Labour Force Survey is considered a more accurate measure of unemployment.
  • Unemployment can be particularly difficult to accurately calculate due to the existence of the hidden economy, which consists of illegal work and generally untaxed legal work. There is also the issue that hidden unemployment is not taken into account, and so the true figure of unemployed people may not be available.
  • A high level of unemployment has a damaging effect on both the economy (in terms of economic growth and government expenditure) and the society and its people, which manifests in social issues such as increased crime and harm to the population’s physical and mental health.
  • The government combats unemployment with the use of demand-side policies, such as fiscal policy and monetary policy.

Measures of Unemployment

Unemployment is measured in economics as either a number or a percentage. This is the case using the measures of The Claimant Count (number) and The Labour Force Survey (percentage). 

  • It can be inaccurate. 
  • There is an underestimation of unemployment. This is caused by the hidden unemployment, as these measurements don’t take into account those who are 'discouraged workers' and those who are not 'actively looking for work'. 
  • There is no distinction between those who are fully employed and part-time workers.
  • There can also be an overestimation of unemployment. This is due to the possibility of people working in what is known as the hidden economy. 
  • The differences in unemployment between people of different demographics are not taken into consideration.

Overall, higher employment in the economy correlates with higher inflation.

Final Measures of Unemployment Quiz

Question

Define unemployment.

Show answer

Answer

Unemployment refers to the state of being unemployed. This refers to those who are willing and able to work at the going wage but cannot find a job despite actively searching for it.

Show question

Question

How does unemployment differ from unemployment rate?

Show answer

Answer

Unemployment rate differs from unemployment itself as it is a percentage of the labour force who are unemployed. 

Show question

Question

Define the labour force.

Show answer

Answer

The labour force is the people who are employed (working) and people of working age who are unemployed (not working but seeking work). This excludes children, retired people, adult students, anyone who cannot work due to disability or illness, and those who are unwilling to work.  

Show question

Question

What are the measures for unemployment in the UK?

Show answer

Answer

The two measures of unemployment used in the UK are the Claimant Count and the Labour Force Survey. 

Show question

Question

What are the advantages of the Claimant Count measure?

Show answer

Answer

  • It is a relatively easy method to collect data. It requires counting of the number of people claiming JSA for instance, and so it is considered cost effective as there is no cost in collecting the data.
  • It can be updated very regularly as the systems in place are all computerised, which serves to ensure a more accurate representation of the level of unemployment.
  • It is not complicated and therefore easy to understand.

Show question

Question

What are the disadvantages of the Claimant Count measure? 

Show answer

Answer

  • It is not a reliable indicator of unemployment due to frequent policy changes in terms of who is eligible for benefits. 
  • It generally underestimates the real number of unemployed people, as not everyone claims unemployment benefits, either for personal reasons or because requirements placed by the government do not permit them. 
  • Some people might claim benefits fraudulently, while working in the 'black market' or 'hidden' economy. 
  • It is not useful when making international comparisons, as different countries have different claimant requirements.

Show question

Question

What are the advantages of the Labour Force Survey as a measure?

Show answer

Answer

  • It is more accurate because it is a survey that is sent around the country. Data is collected by a real person and not a machine.
  • It is an internationally accepted measure of unemployment, and so international comparisons are more valid (as the definition is standardised).  

Show question

Question

What are the disadvantages of the Labour Force Survey as a measure?


Show answer

Answer

  • It is expensive and time-consuming to run, and so is only updated annually.
  • Like other surveys, there is the likelihood that the sample does not represent the entire population appropriately.
  • The monthly estimates are not as accurate as the full, quarterly result, which means they must be revised when the quarterly figures are known. 
  • Additional administrative resources are required, aside from those related to measuring and administering welfare claims. 

Show question

Question

What are the difficulties in measuring unemployment?

Show answer

Answer

  • Inaccuracy. 
  • Underestimation. This is caused by the hidden unemployment, as these measures do not take into account those who are 'discouraged workers' and those who are not 'actively looking for work'. 
  • There is no distinction between those who are fully employed and part-time workers.
  • The issue of overestimation due to the possibility of people working in what is known as the hidden economy. 
  • The differences in unemployment between people of different demographics are not taken into consideration.

Show question

Question

What are the effects of unemployment on the economy?

Show answer

Answer

A high levels of unemployment has a damaging effect on both the economy. These are some of the consequences:

  • Loss of real output (real GDP).
  • Loss of government income (less tax revenue and more unemployment benefits).
  • More unequal income distribution.
  • Negative effect on companies and corporations as fewer people are willing and available to work and able to afford their products.
  • Difficulty finding work, particularly for those who have been out of work for a while. 

Show question

Question

What are the personal and social problems associated with unemployment?

Show answer

Answer

Personal problems: high rates of unemployment can indicate low levels of standards of living in an economy. This may also be an indicator of the propensity of health risks associated with income and standard of living.


Greater social problems - high levels of unemployment could lead to a potential increase in external costs to society in the form of increased crime, alcoholism and vandalism. 




Show question

Question

What are the measures that a government can take to reduce unemployment?

Show answer

Answer

Monetary policies.

Depreciation of exchange rate.

Fiscal policies.

Show question

Question

What does a monetary policy do?

Show answer

Answer

A monetary policy or an expansionary monetary policy is used to reduce unemployment. It aims to increase aggregate demand and GDP (economic growth). 

Show question

Question

What does a fiscal policy do?

Show answer

Answer

A fiscal policy or expansionary fiscal policy is used to decrease unemployment by increasing AD and the rate of economic growth by increasing government spending and reducing tax rates. 

Show question

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