Accuracy of the Unemployment Rate

There are four grounds which we could criticize the official unemployment rate:

· Firstly, a person who responds that she worked only part time in the previous week will be classified as employed. But, if this part-time status is not what the person was hoping for, then some real unemployment is being covered over in the reported statistics. Therefore, it can be understated because part-timers are included as full-timers.

· Secondly, some people are unemployed, are not actively looking for work, but would accept a job would one become available. This may happen if they had been actively looking for work but were unsuccessful; this could discourage them and cause them to voluntarily withdraw from the labor force and thus would not be counted as unemployed. So, it can be stated as understated because they exclude discourage workers.

· Thirdly, when people who are collecting EI or welfare payments are asked if they are actively seeking work, they usually say “yes”. Yet, at least some of these individuals are not involuntarily unemployed but are, instead, simply waiting for benefits to expire before returning to active participation in the job market. Therefore, the unemployment rate is overstated because of false information from EI recipients.

· Fourthly, people in the underground economy who are working in illegal occupations are going to declare themselves as unemployed. As well, individuals who have legal jobs might declare themselves as unemployed just to not pay income tax. Therefore, it is overstated because of false information from those working in the underground economy.

To conclude, the unemployment rate will never be an exact measure but it is still a useful index. The most useful aspect of the index is that it shows the general direction of the unemployment rate. Comparing it over months or years can show the general employment trend and can show the direction of changes in unemployment. That is what the rate should be used to show. You cannot use any single month of statistics on its own.

Sources

This information is from the class notes, in the manual at pages 136-137 and through this website.

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