Why the Unemployment Rate is not the Real Unemployment Rate

Can-US-Employment-to-population-ratio

The unemployment rate is defined as “the percentage of the people in the labour force who are unemployed.”1 Although it is considered one of the most important measures of the success or failure of a government’s economic policies, it is a misleading statistic because it does not include people who have stopped looking for work. To determine the real unemployment rate, the labour force participation rate must also be considered, and more importantly, the employment-population ratio.

The labour force participation rate is “the percentage of the working-age population who are members of the labour force.”2 The labour force includes everyone who has a job or is actively seeking one. In August 2015, Canada’s labour force participation rate was 65.9%, while the unemployment rate was 7.0%.3 In contrast, the U.S. had a lower unemployment rate (5.1%), but the labour force participation rate was only 62.6%, the lowest level since 1977.4 Although Canada had a 1.9% higher unemployment rate, the labour force participation rate was 3.3% higher. This means that a higher percentage of working-age Canadians had jobs than Americans did.

The chief problem with the unemployment rate statistic is it only includes people who are actively seeking work. If a person stops looking for work, they are no longer counted as members of the labour force. For example, in August 2015, 1.8 million people in the U.S. were “marginally attached to the labour force.”5 Even though they had applied for a job in the past twelve months, they were not counted among the unemployed because they had not applied for a job in the past four weeks.6 Long-term unemployment can be emotionally discouraging for an individual, but if that person “gives up” looking for work, the U.S. government no longer considers them unemployed, and the unemployment rate drops.

A second problem with the unemployment rate is it can fall if the size of the labour force falls at a faster rate. In June 2015, the U.S. added 223,000 jobs, and the unemployment rate fell to 5.3% from 5.5% in May.7 However, the size of the labour force decreased by 432,000 as the labour force participation rate fell to 62.6% from 62.9%.8 The unemployment rate fell by .2%, but the labour force decreased by .3%. What appeared to be good news was actually bad news for the economy.

The most accurate measure of unemployment is the employment-population ratio: “the percentage of people of working age who have jobs.”9 Unlike the labour force participation rate, the employment-population ratio includes people who have stopped looking for work. In August 2015, the U.S. ratio was 59.4%,10 while in Canada it was 61.3%.11 Despite having a 1.9% higher unemployment rate, 1.9% more working age Canadians had jobs than Americans did.

When the unemployment rate falls, the media will often report this as good economic news; however, the actual reality may be better (or worse) than what is reported. The next time you hear the unemployment rate reported, compare it with the labour force participation rate and the employment-population ratio. These two statistics reveal the true state of unemployment.

Notes

  1. Michael Parkin and Robin Bade, Macroeconomics: Canada in the Global Environment (Toronto: Pearson, 2008), 494.
  2. Parkin and Blade, Macroeconomics, 494.
  3. “Labour force characteristics, seasonally adjusted, by province (monthly),” Statistics Canada, accessed September 16, 2015, http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/lfss01a-eng.htm
  4. Andy Kiersz, “The labor force participation rate falls to a 38-year low,” Business Insider, July 2, 2015, http://www.businessinsider.com/labor-force-participation-rate-falls-to-38-year-low-2015-7
  5. Ibid.
  6. Ibid.
  7. Claire Zillman, “U.S. economy adds 223K jobs in June as unemployment dips to 5.3%,” Fortune, July 2, 2015, http://fortune.com/2015/07/02/june-2015-jobs-report-unemployment/
  8. Zillman, “U.S. economy adds 223K jobs in June as unemployment dips to 5.3%,” http://fortune.com/2015/07/02/june-2015-jobs-report-unemployment/
  9. Parkin and Blade, Macroeconomics, 495.
  10. “Labor Force Statistics from the Current Population Survey,” U.S. Department of Labor, accessed September 16, 2015, http://data.bls.gov/timeseries/LNS12300000
  11. “Labour force characteristics, seasonally adjusted, by province (monthly),” http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/lfss01a-eng.htm
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