Unemployment: Its Measurement and Types

Download the complete Explainer 278KB

The unemployment rate is the nearly commonly used indicator for understanding conditions in the labour marketplace. The labour market is the term used by economists when talking almost the supply of labour (from households) and demand for labour (by businesses and other organisations). The unemployment rate tin also provide insights into how the economy is performing more generally, making it an of import factor in thinking about monetary policy.

This explainer outlines two key topics related to unemployment.

  1. How is the unemployment rate measured?
  2. What are the principal types of unemployment?

How is the unemployment rate measured?

Unemployment occurs when someone is willing and able to work but does non have a paid job. The unemployment rate is the percentage of people in the labour force who are unemployed. Consequently, measuring the unemployment rate requires identifying who is in the labour force. The labour force includes people who are either employed or unemployed. Figuring out who is employed or unemployed involves making practical judgements, such equally how much paid piece of work someone needs to undertake for them to be considered as having a job, equally well equally really counting how many people have jobs or non.

In Commonwealth of australia, the Australian Agency of Statistics (ABS) is responsible for collecting labour market data. The ABS conducts a survey each month – called the Labour Force Survey – in which it asks around 50,000 people about their participation in the labour market. As office of this survey, the ABS groups people anile fifteen years and over (the working-age population) into three broad categories:

  • Employed – includes people who are in a paid job for one hour or more in a calendar week.
  • Unemployed – includes people who are non in a paid job, only who are actively looking for piece of work.
  • Not in the labour force – includes people not in a paid chore, and who are non looking for piece of work.

    This tin can include people who are studying, caring for children or family members on a voluntary ground, retired, or who are permanently unable to work.

Once the number of people in each of these categories has been estimated, the following labour market indicators can be calculated:

  • Labour force – the sum of employed and unemployed people.
  • Unemployment charge per unit – the percent of people in the labour forcefulness that are unemployed.
  • Participation rate – the percent of people in the working-age population that are in the labour forcefulness.

Box: Calculating the Unemployment Rate – An Instance

To understand how the unemployment rate is calculated we can use an instance. In this instance 12.six million people are employed and 0.seven million people are unemployed. The size of the labour strength is calculated as the sum of these groups.

With the unemployment rate being the percentage of people in the labour forcefulness who are unemployed, using the numbers in our example and the equation below, the unemployment rate is calculated every bit 5.3 per cent.

The unemployment rate is afflicted by changes in the number of unemployed people (the numerator), which tin can effect from cyclical factors, such every bit the number of people who become unemployed because of an economic downturn, or more structural factors in the economic system (see 'What are the main types of unemployment?' below). The unemployment charge per unit is also affected by changes in the size of the labour force (the denominator).



Box: Calculating the Participation Rate – An Example

The participation rate expresses the labour force as a percent of the working-historic period population. The working-historic period population includes Australian residents aged 15 years and over (with some exceptions, such as permanent defence force forcefulness members).

Using the numbers in the instance above there are xiii.3 million people in the labour strength and, if the working-age population is 20.0 1000000 people, the participation rate is 66.five per cent.

Labour force participation typically moves with the business wheel. When businesses are hiring more workers and offer college wages, the incentives are greater to actively wait for work. In contrast, when businesses are not hiring and offering smaller wage increases, there is less of an incentive for people to look for work.

There are too structural influences affecting labour force participation that are independent of the business organization bicycle. Some examples of trends that have affected the participation rate in the past include: more opportunities to work function time; an increase in the number of females looking for work (increased female participation); and people working for longer equally they delay their retirement.


What are the primary types of unemployment?

There are 3 primary types of unemployment – cyclical, structural and frictional unemployment. In practice, these cannot be measured directly, and they tin ofttimes overlap, but they provide a useful style of thinking about unemployment.

Cyclical Unemployment

Cyclical unemployment occurs with changes in economic activity over the concern cycle.

During an economic downturn, a shortfall of demand for goods and services results in a lack of jobs beingness available for those who want to work. Businesses experiencing weaker demand might reduce the amount of people they employ past laying off existing workers, or hiring fewer new workers. Equally a event, people looking for work will also observe it harder to become employed. The reverse situation occurs when demand strengthens.

Cyclical unemployment is oft described every bit being medium term in nature (1 to 12 months). Examples can be seen in the unemployment rate ascension sharply with the early 1990s recession, declining to low levels by the mid 2000s earlier rise again around the fourth dimension of the global fiscal crisis.

An increase in cyclical unemployment might advise the economic system is operating below its potential. With more people competing for jobs, businesses might offer lower wage increases, which would contribute to lower inflation. Policies that stimulate aggregate demand, such every bit expansionary monetary policy, can help reduce this type of unemployment (considering businesses experiencing stronger demand are likely to utilize more people).

Structural Unemployment

Structural unemployment occurs when there is a mismatch betwixt the jobs that are available and the people looking for work. This mismatch could exist because jobseekers don't have the skills required to do the available jobs, or because the available jobs are a long manner from the jobseekers.

Workers may become unemployed if they piece of work in industries that are declining in size or have skills that could be automated equally a result of large-scale technological advances. It may be difficult for them to discover piece of work in another manufacture and they may demand to develop new skills or move to a region that has more opportunities.

For instance, there has been a noticeable decline in the share of people employed in routine manual jobs over contempo decades with some of these jobs being automated considering of advances in technology. The manufacturing industry is an example of an manufacture that has a high share of routine manual jobs and its size in the economic system has declined (both in terms of production and employment).

Structural unemployment tends to be longer lasting than other types of unemployment. This is considering it can take a number of years for workers to develop new skills or move to a different region to find a task that matches their skills. As a result, workers who are unemployed because of structural factors are more than likely to face long-term unemployment (for more than 12 months).

In contrast to cyclical unemployment, structural unemployment exists even when economical conditions are expert. In theory, this type of unemployment should not directly influence wages or inflation and is all-time addressed through policies that focus on skills and the supply of labour.

Frictional Unemployment

Frictional unemployment occurs when people motility betwixt jobs in the labour market, besides every bit when people transition into and out of the labour force.

Motility of workers is neccessary for a flexible labour market place and helps attain an efficient allocation of labour across the economy. However, people may not find jobs immediately and need to invest time and endeavour in searching for the right job. Businesses also spend time searching for suitable candidates to fill up chore vacancies. Equally a result, people looking for jobs are not matched immediately with vacancies and may feel a catamenia of temporary unemployment.

This type of unemployment is mostly shorter term (less than one month). Frictional unemployment is likely to occur at all points of the business bike and, similar structural unemployment, may non influence wages or aggrandizement.

These 3 types of unemployment are not independent of each other. For case, a period of high cyclical unemployment might lift structural unemployment. This could occur when people are unemployed for such a long period that their skills and productivity deteriorate, and they get seen as existence less employable, reducing the probability that they volition be hired in the time to come.

Other Types of Unemployment

There are some other types of unemployment that are also important to consider. In particular, the underemployment charge per unit can be thought of every bit a complementary indicator to the unemployment charge per unit when thinking about conditions in the labour market place.

  • Underemployment occurs when people are employed, simply would like and are available to work more hours. At that place are two categories of underemployed people divers by the ABS. Start, part-time workers who would adopt to piece of work additional hours. Second, people who unremarkably work full time, merely are currently working part-fourth dimension hours. Underemployment rates are generally higher among groups that have a larger proportion of people working part fourth dimension, such as females, younger workers and older workers.
  • Hidden unemployment occurs when people are non counted as unemployed in the formal ABS labour marketplace statistics, but would probably work if they had the chance. For example, someone might have looked for work for a long time, given upward hope and stopped looking, but all the same wish to piece of work. (These people are sometimes referred to as 'discouraged workers'.)
  • Seasonal unemployment occurs at different points over the yr because of seasonal patterns that impact jobs. Some examples include ski instructors, fruit pickers and vacation-related jobs. The ABS publishes seasonally adapted labour marketplace statistics, which remove seasonal patterns in the data.