Unemployment: Are we actually measuring it correctly?

A recent study has compared and contrasted four different definitions of unemployment and mapped them against one another, highlighting that broader definitions do not provide better indicators of the economic cycle.

New research from e61 Institute has discovered that, although the current measure of unemployment may hide some details about the overall level of unemployment, according to the report, broader definitions do not provide better indicators of the economic cycle.

The report looked at the different ways that unemployment can and is measured. For example, young graduates looking for jobs or passively seeking work could be classed as unemployed, which would raise the rate by a number of percentage points.

The key takeaways from the report highlight this factor:

• Including those who search passively for work in the unemployment group leads to a 1.25 percentage point increase in the reported unemployment rate.
• Young workers are most significantly affected by these changes, increasing the observed unemployment rate by approximately two percentage points.
• This does not affect our view of the economic cycle – as the proportion of individuals passively searching is relatively similar through time.

For all age groups, measures of unemployment would clearly be significantly higher if they included the individuals searching for work passively. An example of being on a passive work search would be someone who is sending off job applications but does browse for jobs online. And as stated in the key takeaways, this increase is larger for young Australians.

However, even though the measured unemployment rate would be higher, it does not follow that the Reserve Bank will need to change what they are doing. As pre-doctoral economist at the e61 Institute and author Zachary Hayward stated: “The reason this definition may matter for Reserve Bank policy is if the new measure aligned more closely with the economic cycle.”

“If it did, policy responses that ignored these measures would respond slowly to rising or falling inflation – exacerbating cost-of-living shocks during booms and generating unnecessary job loss during downturns,” said Hayward.

“Looking at the data, the new unemployment measure moves in a very similar way to the standard definition of unemployment over the economic cycle. While the gap was slightly wider during the global financial crisis and the end of the mining boom, ultimately, it adds little to no useful information about the economic cycle.”

The research reveals that the impacts of the labour market can prove to be a barrier to more people than the usual unemployment statistics show. However, the current measure is still appropriate.

“This research highlights two things. The current measure of unemployment is largely appropriate for thinking about monetary policy and the economic cycle. However, at all times, there are also more individuals searching for work than headline figures suggest – indicating that barriers to labour market entry impact on the lives of more people than commonly assumed,” concluded Hayward.

Overall, the research finds that changes to the definition or the measure of unemployment tend to have a non-trivial effect, particularly for the young. Despite this, the baseline measures appear to be effective for understanding the economic cycle – as the research finds that the expanded definition provides little additional information about the economy.