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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 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.
Unemployment is measured as either a number or a percentage. When we're talking about the unemployment rate though, we use a percentage. The formula for measuring unemployment is:
\(Unemployment\ Rate = \frac{\hbox{Number of unemployed}}{\hbox{Labour force}}\times 100\)
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.
Unemployment rate measures in the UK are:
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:
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.
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.
When there are high levels of unemployment in a country, this bears both social and economic costs on the economy.
The economic problems include:
The personal and social problems associated with unemployment include the following:
Check out our explanation to learn more about the different types of Externalities.
Governments usually take both supply-side and demand-side policy measures to tackle unemployment as seen in Figure 1.
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).
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.
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.
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.
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).
Overall, higher employment in the economy correlates with higher inflation.
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