The reality of the Unemployment Rate | Explained

Unemployment is an economic condition in which someone actively looking for a job remain unemployed whereas unemployment rate is the share of the labor force that is unemployed. The unemployment rate is expressed in percentage. Although, the calculation of unemployment & labor force participation rate looks pretty straightforward there are several complications involved in measuring these rates. Moreover, many economists term these rates as a big lie or hoax.

Real Unemployment Rate

In my previous article, I have discussed the ‘Cost of Unemployment’ & In this article, I’m going to discuss the labor force & its participation rate. Later, I will discuss unemployment rate and the ‘Reality’ of the unemployment rate for the top world economies.  

How is Labour Force defined?

Labor Force is defined the number of people who are either employed or unemployed. Workers are considered jobless or unemployed if they currently do not work, despite the fact that they are able and willing to do so. The total labor force consists of all employed and unemployed people within an economy. According to Bureau of Labor Statistics, someone who is not looking for a job from past four weeks is not considered in the Labor Force.  

The concept of labor force looks simple by the definition. If we dig deeper, the definition an employed person and an unemployed person can make this concept much complicated. Thus, making us call the unemployment rate a ‘Big lie’ or a ‘Hoax’.

Who is considered employed?

  1. Underemployed are considered as employed.
  2. Part-time workers are considered as employed.
  3. Disguised workers are also considered employed.

Who is not considered Unemployed?

  1. People who haven’t looked for work from past four weeks due to some natural issues such as transportation problem, ill health etc. are not considered as unemployed.
  2. People who searched for a job for a long time but gave up looking for it four weeks ago are not considered unemployed. They are also known as “Discouraged workers”.
  3. All the retired people, housewives or homemakers and students are considered out of the workforce.
  4. Everyone under 16 is excluded in the labor force participation, even if they are working. 

This the reason why many economists believe if the hidden unemployment, underemployment & disguised unemployment (which are obviously difficult to measure) are taken into account, the actual unemployment rate will be much higher than the official unemployment rate.

Calculation of Unemployment Rate

The official unemployment rate is defined as the number of unemployed persons divided by the total labor force. Whereas, the Labor force participation rate is defined as the total labor force divided by the total population.  

The formulas given below describe how unemployment rate & labor participation rate fits into the population.

  • Total Population = ‘X’
  • Labor force = Employed + Unemployed 
  • Labour Force Participation Rate= [Labor Force/ Total Population]*100
  • Unemployment Rate = [Unemployed / Labor Force]*100
  • Unemployed = Unemployment Rate*Labor Force Participation Rate*Total Population2

Using these formulas and few other related stats the study on unemployment rate of top world economies was performed.

The unemployment rate of Top World economies

Considering a retired person into a labor force doesn’t make any sense. For Example, Floyd Mayweather announced his retirement last year and now he is enjoying on the beaches of Florida. Clearly, he is not unemployed. Similarly, not considering an underemployed, or a disguised worker or a discouraged worker into the workforce is out of the question. 

In this study, we are going discuss the unemployment statistics of the top world economies namely China, India, US, Peru, Russia, Brazil, Canada, South Africa, Germany, France and Indonesia. We will be comparing their population to the Labor force, the actual Labor force to the labor force, unemployment rate to actual unemployment rate and lastly, unemployed to the actual Unemployed.

1. Population to Labor Force

India & China are the population leaders with around 40% of the total world population whereas the United States stands on the third number in terms of population. The below chart shows the difference between the population & the labor force participation of different countries.

Population V/s Labor Force

For India, France & South Africa the labor force participation rate is minimum i.e. 50-55%. It is 60-63% for the United States, Germany, Russia & Brazil. It is maximum for Peru at 76% whereas it is around 65% for Canada & Indonesia.

2. Actual Labor Force V/s Labor Force

The labor force stats changes when we start considering everyone above the age of 16 in the labor force. The below chart shows the difference between the Actual Labor Force to the Labor Force. 

Actual Labor Force V/s Labor Force

The Labor Force difference is least for Germany, Canada & Peru i.e. 7-10%. It is 18-20% for countries like China, France, Indonesia, South Africa & Brazil. The difference is maximum for Russia i.e. 32% whereas, for India & the United States, it is 25% & 28% respectively.

3. Unemployment Rate V/s Actual Unemployment Rate

The unemployment rate increases dramatically when all the underemployed, disguised workers &  discouraged workers are considered unemployed. The above chart shows the difference between the unemployment rate & the actual unemployment rate. 

Unemployment Rate V/s Unemployment Rate

South Africa shows the highest unemployment rate in both the cases with a difference of 20%. The maximum rate difference of 30% is shown top economy leaders i.e. India, Russia & United States. The minimum difference of 10-11% is shown by Peru, Brazil, and Germany whereas as countries like China, Indonesia & France shows a difference of 20-23% in their unemployment rate. 

4. Unemployed V/s Actual Unemployed

India is the most suffering country when it comes to the actual number of unemployed. India has around 350 million unemployed followed by China with 300 million unemployed. The United States takes the third position with around 100 million unemployed. This above chart shows the reality of the unemployment rate more clearly.

Unemployed V/s Actual Unemployed

India & US shows the highest ratio of the number of Unemployed V/s Actual Unemployed i.e. 14 & 12 times respectively. When it comes to China and Russia, the ratio is 8 & 10 times respectively. However, The ratio is least i.e. 3 for countries like Brazil, Peru, Germany & Canada whereas the ratio is 4 & 6 respectively for France & Indonesia.

Example proving the unreality of the Unemployment Rate.

In the above study, the unemployment rate of the United States is 4.1% as per Bureau of Labor Organization which is same as July 1997. Even if we consider the broader U-6 unemployment rate, which includes discouraged workers, underemployed workers, and the part-time workers, the unemployment rate is still at 9.7 percent in July, compared with 8.6 percent in July 1997. Does this mean the labor market is as healthy now as it was then? No, it doesn’t.

The early days of the late-1990s was a boom. Computers & communications technology were creating millions of job. And now, AI is taking the tech support jobs, cheap Chinese & India labors are taking manufacturing job. So, why is the unemployment rate same? 

References:

  1. Unemployment Rate – Reference 1
  2. Population – Reference 2  
  3. Actual Unemployment – Reference 3Reference 4, Reference 5, Reference 6   
  4. Labour Force Participation Rate – Reference 7  

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