June 13 2014
The Tricky Business of Defining Unemployment
Rachel DiCarlo Currie
As AEI scholar Nick Eberstadt recently noted, the U.S. unemployment rate is an “increasingly inaccurate” measurement of labor-market health. It stood at 6.3 percent in May, down from a post-recession high of 10 percent in October 2009. Yet over that same period, the labor-force-participation rate (LFPR) dropped from 65 percent to 62.8 percent. The unemployment rate would be significantly higher if the LFPR had stayed constant or had declined by a smaller amount, because people who’ve quit the labor force are not counted as being “unemployed.”
But how do we know for sure whether someone has left the labor force? Ylan Mui of the Washington Post explains that, if a person without a job is “looking for work,” then they are considered part of the labor force and thus are included among the “officially” unemployed. Of course, “looking for work” can mean different things to different people. Here’s Mui:
[W]hat counts as “looking for work”? Applying for a job? Scanning a job board? Updating your résumé? Signing up for LinkedIn?
The difficulty in settling on a single definition becomes clear when comparing the United States to our neighbors in the north. The official definition of unemployment in America requires “actively” looking for a job in the past month. That includes contacting an employer directly, visiting a job placement center and sending out your résumé. It specifically does not include so-called “passive” actions such as scanning The Washington Post jobs section.
The opposite is true in Canada. The country’s official statistical agency lists “looked at job ads” as one of the acceptable methods of searching for employment. Statistics Canada said that if the country’s unemployment rate were adjusted to match the U.S. measurements, it would fall from 6.9 percent to 5.9 percent.
“Most industrialized countries, including Canada and the United States, subscribe to guidelines established by the International Labour Office for defining and measuring labour market status, including unemployment. However, the guidelines are, by design, rather imprecise, so that individual countries can interpret them within the context of their own labour markets,” the agency explains on its Web site.
In fact, until last year, the ILO was pretty lax in requiring countries -- particularly in the developing world, where labor markets are still heavily informal -- to incorporate “looking for work” into their definitions of unemployment. For example, South Africa used to publish two unemployment rates: an expanded rate of people who were simply out of a job and wanted to work and a strict rate of people who also had actually looked for a job or tried to start their own business. The differences could be stark: In 1999, the expanded unemployment rate was 36.2 percent, but the strict rate was 23.3 percent.
“It’s messy enough in the high-income world where we have markets and statistics and surveys, but when you start going into the developing world, it becomes much more difficult,” said Andrew Burns, lead economist of the Development Prospects Group at the World Bank. “The definitions all fall apart.”