What Is The Real Unemployment Rate?

Unemployment is a major issue that isn’t far from the news. According to official figures, America has an unemployment rate of 8.3% and Ireland has a rate of 14.7%. However some argue that these could be underestimates and the true figure could be as high as 15% in America and 25% in Ireland. The government has a natural interest in the unemployment rate being as low as possible; with some claiming they openly twist the numbers to suit themselves. This is a contentious issue with an election coming up and some claim unemployment could decide who the next President of America is. So what is the real rate of unemployment?

The official rate of unemployment is known as U-3 in America or S-1 in Ireland. It is everyone who wants a job and is looking for one but cannot get one. It is known as the headline rate and is the one reported in the news. However it does not cover everyone. If you do not have a job but have simply given up looking for one then you are not counted as unemployed. Even though you would take a job if offered to you, you are not counted in official figures. Likewise many people are in education or work at home but would take a job if one was available. These people are referred to as “discouraged workers” or “marginally attached” and are counted in the U-5 figures in America and the S-2 in Ireland.

Then there are people who want to work full time but have had their hours cut. This is known as “underemployment”. This can also refer to someone who is not using their full potential such as someone with a degree working in McDonalds or driving a taxi (though this is vaguer and harder to measure). The measurement of those who are involuntarily working part time is known as the U-6 in America or the S-3 in Ireland.

In this way there are a range of different measures all collected by official sources (Bureau of Labor Statistics in America and The Quarterly National Household Survey in Ireland). The charts below show the respective levels of unemployment. The most notable thing is that the broadest measure of unemployment is almost twice as large as the narrowest.

The different measurements of American unemployment

In the 3rd Quarter of 2011, Irish unemployment was 15.5% according to S1, 18.9% according to S2 and 25% according S3. In America in July 2012, the unemployment rate is 8.3% according to U-3, 9.7% according to U-5 and 15% according U-6.

Different measurements of Irish unemployment

But is this accurate? Can someone working part time be called unemployment? The government will naturally support the lowest measure and the opposition will naturally support the highest number. It is true that they have been negatively affected by the recession but so have people who have had their wages cut. I don’t think it is accurate to describe someone with a job (albeit on part time) as unemployed. It is true that they are suffering but there should be a separate measure for them. However discouraged workers should be counted. I think the S-2 and U-5 figures would be the most accurate.

They are not perfect as they do not count those who have taken early retirement, are in education, are working at home but would rather have a job etc. These people are not counted as unemployed as they have dropped out of the labour force. If Ireland had the same number of people in the labour force as it did in 2007 unemployment would be twice as high at 30%. For America the figure would be 12%.

One thought on “What Is The Real Unemployment Rate?”

  1. I like the number-of-employed-as-%-working-age-population measure too (Krugman’s favourite). Doesn’t capture underemployment but does fully measure working age inactivity.

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