5.3 Other Classifications of Employment and Shortcomings of the Unemployment Measure
Some people are still mislabeled in the categorization of employed or unemployed. Those who have only part-time jobs and are looking for full-time employment are counted as employed, although they are not employed in the way they would like or need to be. This group is called involuntary part-time workers or employed part-time for economic reasons.
Additionally, some individuals are underemployed. This includes those trained or skilled for one type or level of work but working in a lower-paying job or one that does not utilize their skills. For example, we would consider an individual with a college degree in finance working as a sales clerk underemployed. They are, however, also counted in the employed group. All of these individuals fall under “hidden unemployment.” Involuntary part-time workers also add to the underemployment category.
Another group is the Discouraged workers who have stopped looking for employment and, hence, are no longer counted as unemployed, fall into this group. According to Stats Canada, people who have not looked for jobs in the past four weeks are categorized as discouraged workers because they are not “actively” looking for jobs. As we will see in the following example, when a large number of people become discouraged, all else equal, the unemployment rate can actually fall!
Example
Consider the following example. Assume that each adult member of a population is represented in exactly one of the classifications in Fig 5.2. Let us calculate the labour force participation rate and the unemployment rate. Then, we will re-calculate both of these when workers become discouraged.
| Group | People (millions) |
| Full-time employed | 120 |
| Part-time employed by choice | 40 |
| Employed part-time for economic reasons | 60 |
| No job but actively looking for work | 30 |
| No job but choosing not to work | 80 |
| Discouraged worker | 20 |
Let us classify each group. The first three groups are all employed. Regardless of whether you work full-time or part-time and regardless of whether you want full-time work when working part-time, you are employed. In our example, we consider only one group to be unemployed: “no job but actively looking for work.” The next group, “no job but choosing not to work,” is not considered to be unemployed because they are not searching for work. Therefore, they are not in the labour force. The final group, the “discouraged worker,” is also not part of the labour force. The members of this group would like a job but have given up searching for work.
The calculations for this example are as follows:
[latex]\text{Employed}=120+40+60=220[/latex]
[latex]\text{Unemployed}=30[/latex]
[latex]\text{Labour Force}=220+30=250[/latex]
[latex]\text{Not in Labour Force}=80+20=100[/latex]
[latex]\text{Working Age (Adult) Population}=220+30+80+20 =350[/latex]
[latex]\begin{align*}\text{Labour Force Participation Rate}=100\times\frac{250}{350}=100\times 0.714= 71.4\%\end{align*}[/latex]
[latex]\begin{align*}\text{Unemployment Rate}= 100\times\frac{30}{250}=100\times 0.12=12.0\%\end{align*}[/latex]
Now, let us adjust the data. Suppose the country is currently in a relatively deep recession, and it is almost impossible to find a job because companies are only cutting jobs and not hiring. What if, of the 30 million unemployed, 20 million become discouraged? This means they give up searching for work because of poor economic conditions. So, the number of discouraged workers now increases.
[latex]\text{Employed}=120 + 40 + 60 = 220[/latex]
[latex]\text{Unemployed}= 10[/latex]
[latex]\text{Labour Force}= 220 + 10 = 230[/latex]
[latex]\text{Not in Labour Force}= 80 + 20 = 100[/latex]
[latex]\text{Adult Population}= 350[/latex]
[latex]\begin{align*}\text{Labour Force Participation Rate}= 100\times\frac{(230)}{(350)}= 100\times (0.657) = 65.7\%\end{align*}[/latex]
[latex]\begin{align*}\text{Unemployment Rate}= 100\times\frac{(10)}{(230)}= 100\times (0.043) = 4.3\%\end{align*}[/latex]
We understand the major shortcomings of the official unemployment measure. By not including discouraged workers, the unemployment statistics are underestimated. Although these people have given up job search due to repeated failures in finding a job, nevertheless, they would accept a job if offered. Also, part-time workers looking for full-time jobs but unable to find one are included as employed. They might be actively seeking full-time work and should have been included in the unemployed measure. Then there lies the underemployed people, considered the “hidden unemployment” group. If the above statistics were included, this would have increased the official unemployment figure.
Attribution
“8.1 How Economists Define and Compute Unemployment Rate” from Principles of Macroeconomics 2e by Open Stax is licensed under a Creative Commons Attribution 4.0 International License.
“6. Unemployment” in Introduction to Macroeconomics by J. Zachary Klingensmith is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
