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Comparing Two Different Measures of Unemployment
In order to talk about the ‘level of unemployment’ in any meaningful way, you have to be able to measure the amount of unemployment in an economy. You may think that an obvious way is to count the number of unemployed people – and you’d be right. The only thing is that different definitions apply to what it means to be unemployed!
To give you some idea about the potential difficulties, think about whether you consider the following people to be unemployed or not:
A 66-year-old person claiming a pension. Does it make a difference if the person is looking for work or not?
Someone who has a few hours of work every week but would really like a full-time job.
A full-time student. What about a part-time student?
Someone who’s too ill to work.
Any measure of unemployment has to clarify where each of these people (and others) should feature in the unemployment statistics. In this section we introduce and compare the two main measures of unemployment used in the UK: the International Labour Organization (ILO) measure and the Claimant Count.
ILO: Looking at the big picture
The International Labour Organization (ILO) is an agency of the United Nations (UN). The ILO definition of unemployment is standardised and used by all the major world economies.
The fact that it’s standardised means that economists and others can make meaningful comparisons about unemployment in different countries. For example, in late 2014 unemployment in the UK was around 6 per cent while unemployment in Spain was much higher, at around 23 per cent. The fact that these figures are calculated using the same methodology allows people to make statements such as ‘the unemployment rate in Spain is around four times the unemployment rate in the UK’.
The ILO classifies each person over the age of 16 into one of three categories:
Employed: Someone who carries out more than an hour (yes, one hour) of paid work a week, or is temporarily away, for example on holiday. People on government training schemes are also considered employed as well as those who work for their family business.
Unemployed: Someone who’s not employed (by the above definition) is
able to work and is actively seeking work. In the UK this means someone who has looked for work in the past four weeks and is available to start work in the next two weeks.
Economically inactive: Not a person so broke that he can’t afford to move, but someone who’s neither employed nor unemployed (by the above definitions). Examples of people in this category include full-time students who aren’t looking for work, the retired, the sick and disabled, and housewives/husbands.
Economists call people in the employed and unemployed categories economically active. They then define the unemployment rate as the proportion of the economically active who are unemployed, as follows:
The unemployment rate isn’t the proportion of the population that’s unemployed or even the proportion of all adults who are unemployed. This means that a country can have a low unemployment rate but also many more people not working than working; for example, when it has a lot of retired people and children under the age of 16.
To calculate the unemployment rate, government statisticians carry out a survey called the Labour Force Survey (LFS). Every country in the European Union (EU) is legally obliged to carry out a Labour Force Survey.
In the UK, in any three-month period the LFS interviews around 41,000 households. They ask the members of the household a number of questions about their circumstances and how much they work. According to their answers, the people are placed in one of three categories: employed, unemployed or economically inactive.
In total, the LFS samples around 80,000 individuals over the age of 16. They then weight the results so they’re representative of the UK as a whole. Finally, they adjust the results seasonally to take into account predictable variations in employment over the year (for example, many retail stores hire large numbers of people every year before Christmas).
Although a final number is quoted as the unemployment rate, it’s just
an estimate. If the LFS had interviewed different people, the results would have been slightly different.
Therefore, statisticians calculate a range of values called a confidence interval, where they’re 95 per cent sure that the true level of unemployment lies somewhere in this range.
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