LIMITATIONS OF THE UNEMPLOYMENT RATE

When the unemployment rate is released every month, it is always a source of concern for economists and policymakers alike. This is because it represents the percentage of the labor force who are unemployed.

However, as is with another statistic, the unemployment rate may not include some important data. This means the unemployment rate may not tell the true employment( or unemployment) situation in an economy.

The reason for this is that it is hard to distinguish between unemployed people and people who are "out of the labor force". One problem faced in distinguishing between unemployed and hidden unemployment is hidden unemployment

Hidden unemployment is the total number of people who have been mislabeled in the categorization of being employed, unemployed, and out of work.

Three cases of hidden unemployment can be identified: Discouraged workers, underemployed workers, and undisclosed unemployment.

Discouraged workers are individuals of legal employment age who have given up on looking for jobs after an unsuccessful search for a job.

Because they have stopped looking for jobs, these individuals are not included in the unemployment rate, even though, they are without jobs. Hence, the official unemployment rate may not tell the true story of those jobless.

Underemployed workers, as its name suggests, are workers who are not adequately employed.

By adequately employed, we mean workers not currently employed in the way they would have love.

A part-time worker, who seeks full-time employment, but is not given such privilege is an underemployed worker.

A person with a college degree in mathematics who is working as a marketer is another example of an underemployed worker.

In addition to the already given example, individual who are working in jobs that are under-utilizing their skill is also considered underemployed.

The problem with underemployment is this: the fact that they want more work time or they are utilizing their skills is not considered. Hence, these people are counted as employed even though they are not sufficiently employed.

The last cases of hidden employment are undisclosed unemployment

In some countries, such as the USA, Canada the official unemployment rate usually originates from a survey conducted monthly.

A survey is simply a research method in which subjects respond to series of questions about social issues( in this case, unemployment)

One problem, however, arises from using this research method. Subjects may not reveal their actual employment status.

For example, individuals who are working but are paid "under the table" may respond as being unemployed.

Moreover, individuals may falsify their unemployment status to qualify for unemployment benefits.

Not disclosing your actual unemployment status would, of course, cause the official unemployment rate to be wrongly estimated.

This would, in turn, cause a discrepancy between the actual employment rate and the official unemployment rate.

Final words

Despite these problems, the unemployment rate is still considered a useful economic indicator because it gives us useful information about changes in the economy. 

Moreover, a high unemployment rate is a symptom of recession.

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