Underestimating Unemployment

Unemployment Report

The unemployment rate represents the unutilized supply of labour in the economy. It is considered an indicator of economic health.

Persistent joblessness is associated with a great deal of public hardship. Because of this, politicians are under considerable pressure to maintain a low unemployment rate. Although you wouldn’t know it by their foolish economic policies – including but not limited to: high taxes, spending and borrowing, inflation, excessive regulation, protectionism, price controls, land collectivization and outright corruption – it could be said that politicians’ jobs depend on it.

But, as we’ve seen before, pols don’t let economic ignorance or data stand in the way of re-election. This applies to the unemployment rate as well.

In Canada, labour market data is collected by Statistics Canada using the Labour Force Survey. It includes all Canadians over age 15 and classifies them into one of three categories:

  1. Employed
  2. Unemployed
  3. Not in the Labour Force
The unemployment rate is calculated by dividing the number of unemployed workers by the total labour force. The total labour force is calculated by subtracting the number of people not in the labour force from the total population (15 years and over).Therein lies the rub. If your lack of job prospects causes you to become so discouraged that you cease to continue searching, you are not classified as unemployed. Rather, you are considered to be “not in the labour force”. In addition, if you want full-time employment but can only find part-time (even if it is as low as one hour per week) you are classified as employed. On paper, there is no difference between you and a salaried employee punching the clock for forty hours each week. While designed for a US audience, this video accurately demonstrates the absurdity of the current classification system.

The official unemployment rate in Canada for the month of February was 7.4%. This constituted a 0.2% decrease in the unemployment rate from the month before. Good news, right?

Not so fast. The unemployment rate decreased because fewer people were searching for work. As such, more people were classified as not in the labour force instead of unemployed, resulting in a decrease in the unemployment rate:

A decline in the number of people searching for work pushed the unemployment rate down 0.2 percentage points to 7.4%.

In his excellent book Liberty Defined:50 Essential Issues That Affect Our Freedom, Ron Paul described this situation as follows:

Government unemployment statistics are virtually worthless in describing the seriousness of the economic downturn. The most astounding deception is that if a discouraged individual quits looking for work, he or she is no longer listed as unemployed. When a significant number cease to list themselves as seeking employment, the percentage of unemployment can actually go down.

Using data from the Labour Force Survey, if you incorporate discouraged searchers, those individuals who are waiting for work starting in more than four weeks, and involuntary part-time workers, the unemployment rate jumps to 11.4%.

That’s a whopping 54% increase compared to the “official” unemployment rate. Imagine the fuss if this was revealed to the public. The government would panic. I can picture it now:

Citizens, there is a crisis of unemployment. But fear not: your government has devised a plan to finally rid this jobless scourge, once and for all: we hereby declare… conscription!

On second thought, maybe we can leave the unemployment rate where it is.


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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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