Economic Theory How is Unemployment Defined

One of the most important indicators of the economic health of a nation, state or industry is how many people are unemployed in that area or sector. From the outside, it looks simple; if you don't have a job, then you are unemployed. Yet from the viewpoint of the government (any government) and economic majors, it is not so clear-cut.

To be statistically unemployed, to be included in the official unemployment rate, you have to be qualified to be hired, legally able to work, physically and mentally capable of working, willing to accept the prevailing rate (based upon your skills) and most importantly, you have to be looking for a job. If you do not satisfy all of those requirements, then you are not counted in the unemployment rate.

It is because a person has to satisfy all these conditions that the official unemployment rate can be viewed as being little more than a good estimate of how many people are actually unemployed.

It also allows a governmental body to adjust the unemployment rate (cooking the books) by changing who is statistically unemployed.

(An historical example would be Nazi Germany, whose employment recovery was based more on changing who was counted than number and quality of the jobs that were actually created. Current examples would be any country that counts housewives and college students receiving grants and government loans as being employed.)

At its simplest, the unemployment rate is the percentage of people in the labor force that are not working.

The labor force consists of the employed and unemployed, but not the entire population of a country. For instance, housewives are generally not counted as being part of the labor force; nor are those who are physically or mentally unable to work (due to age, health, or handicap); nor are those who are legally unable to work counted (such as undocumented aliens). The labor force participation rate is the percentage of the population that is in the labor force.

Only those people in the labor force, those people who are available to work, are used to figure the unemployment rate.

As already noted, the unemployment rate is, at best, an estimate. For instance, those workers who have ceased to look for a job, discouraged workers, no matter what the reason (believing that there is no work to be found, deciding to become self-employed, deciding to go to college, etc.) are not counted as being unemployed. Discouraged workers deflate the unemployment rate.

Dishonest workers, those workers who are collecting unemployment benefits, but are secretly working, inflate the unemployment rate.

Compounding the problem of knowing the actual unemployment rate is the fact that often only the numbers of unemployed workers collecting unemployment benefits are reported, causing those who ceased to be eligible for benefits to drop off of the official figures despite their continued unemployment.

Furthermore, the unemployment figures do not give any indication of the number of workers who are being under-utilized (former full time workers forced to work part time and the self-employed who would work for others given better economic conditions).

Yet despite all of these difficulties, the unemployment rate is still one of the best indicators of the economic health of an area.

Besides calculating unemployment by region, unemployment rates can be figured out for specific professions (sometimes done though trade organizations and professional unions). This type of calculation is useful for those considering getting an education for a specific type of job. For instance, writers, artists and actors have a low rate of employment (high unemployment) while doctors, nurses and lawyers tend to be in high demand.

As with the general rate of unemployment, career and industrial rates of unemployment should be considered to be estimates at best.