Measures of Unemployment

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.

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

The unemployment rate

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.

How is unemployment measured?

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

Unemployment rate measures in the UK are:

• the Claimant Count measure
• the Labour Force Survey measure.

Unemployment rate measures: 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.

Unemployment rate measures: The Labour Force Survey

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.

Government measures to reduce unemployment

Governments usually take both supply-side and demand-side policy measures to tackle unemployment as seen in Figure 1.

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.