Once the number of people in each of these categories has been estimated, the following labour market indicators can be calculated:. To understand how the unemployment rate is calculated we can use an example. In this example The size of the labour force is calculated as the sum of these groups. With the unemployment rate being the percentage of people in the labour force who are unemployed, using the numbers in our example and the equation below, the unemployment rate is calculated as 5.
The unemployment rate is also affected by changes in the size of the labour force the denominator. The participation rate expresses the labour force as a percentage of the working-age population. The working-age population includes Australian residents aged 15 years and over with some exceptions, such as permanent defence force members.
Using the numbers in the example above there are Labour force participation typically moves with the business cycle. When businesses are hiring more workers and offering higher wages, the incentives are greater to actively look 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 also structural influences affecting labour force participation that are independent of the business cycle. Some examples of trends that have affected the participation rate in the past include: more opportunities to work part time; an increase in the number of females looking for work increased female participation ; and people working for longer as they delay their retirement.
There are three main types of unemployment — cyclical, structural and frictional unemployment. In practice, these cannot be measured directly, and they can often overlap, but they provide a useful way of thinking about unemployment. Cyclical unemployment occurs with changes in economic activity over the business cycle.
During an economic downturn, a shortfall of demand for goods and services results in a lack of jobs being available for those who want to work. Businesses experiencing weaker demand might reduce the amount of people they employ by laying off existing workers, or hiring fewer new workers. As a result, people looking for work will also find it harder to become employed. The opposite situation occurs when demand strengthens. Cyclical unemployment is often described as being medium term in nature one to 12 months.
Examples can be seen in the unemployment rate rising sharply with the early s recession, declining to low levels by the mid s before rising again around the time of the global financial crisis. Geographic coverage limitations — urban areas, city, regional areas only — results in obvious limitations to comparability to the extent that coverage is not representative of the country as a whole. The overall unemployment rate for a country is a widely used measure of its unutilized labour supply.
If employment is taken as the desired situation for people in the the labour force, unemployment is clearly an undesirable situation. Still, some short-term unemployment can be necessary for ensuring adjustment to economic fluctuations.
Unemployment rates by specific groups, defined by age, sex, occupation or industry, are also useful in identifying groups of workers and sectors most vulnerable to joblessness. While the unemployment rate may be considered the most informative labour market indicator, reflecting the general performance of the labour market and the economy as a whole, it should not be interpreted as a measure of economic hardship or of well-being.
When based on the internationally-recommended standards, the unemployment rate simply reflects the proportion of the labour force that does not have a job but is available and actively looking for work. It says nothing about the economic resources of unemployed workers or their family members.
Its use should, therefore, be limited to serving as a measurement of the utilization of labour and an indication of the failure to find work. Other measures, including income-related indicators, would be needed to evaluate economic hardship. An additional criticism of the aggregate unemployment measure is that it masks information on the composition of the jobless population and therefore misses out on the particularities of the education level, ethnic origin, socio-economic background, work experience, etc.
Moreover, the unemployment rate says nothing about the type of unemployment — whether it is cyclical and short-term or structural and long-term — which is a critical issue for policy makers in the development of their policy responses, especially given that structural unemployment cannot be addressed by boosting market demand only. Paradoxically, low unemployment rates may well disguise substantial poverty, as high unemployment rates can occur in countries with significant economic development and low incidence of poverty.
In countries without a safety net of unemployment insurance and welfare benefits, many individuals, despite strong family solidarity, simply cannot afford to be unemployed. Instead, they must eke out a living as best they can, often in the informal economy or in informal work arrangements. In countries with well-developed social protection schemes or when savings or other means of support are available, workers can better afford to take the time to find more desirable jobs.
Therefore, the problem in many developing countries is not so much unemployment but rather the lack of decent and productive work, which results in various forms of labour underutilization i.
A useful purpose served by the unemployment rate in a country, when available on at least an annual basis, is the tracking of business cycles. When the rate is high, the country is unable to provide sufficient numbers of jobs for the available workers and it could be a sign of economic recession. The goal, then, is to introduce policies and measures to bring the incidence of unemployment down to a more acceptable level.
What that level is, or should be, has often been the source of considerable discussion, as many consider that there is a point below which an unemployment rate cannot fall without the occurrence of inflationary pressures. Because of this supposed trade-off, the unemployment rate is closely tracked over time. The usual policy goal of governments, employers and trade unions is to have a rate that is as low as possible, yet also consistent with other economic and social policy objectives, such as low inflation and a sustainable balance-of-payments situation.
When using the unemployment rate as a gauge for tracking cyclical developments, we are interested in looking at changes in the measure over time. In that context, the precise definition of unemployment used whether a country-specific definition or one based on the internationally-recommended standards does not matter nearly as much — so long as it remains unchanged — as the fact that the statistics are collected and disseminated with regularity, so that measures of change are available for study.
Internationally, the unemployment rate is frequently used to compare how labour markets in specific countries differ from one another or how different regions of the world contrast in this regard. Unemployment rates may also be used to address issues of gender differences in labour force behaviour and outcomes.
The unemployment rate has often been higher for women than for men. Other gender inequalities outside the labour market, for example in access to education and training, also negatively affect how women fare in finding jobs. Nearly eight million U.
That is a huge number of positions gone. Thus, unemployment stays abnormally high for longer than we think it should. How is it measured? What causes unemployment? We introduced the concept of inflation in our earlier discussion of the critical difference between real and nominal GDP. In this module, we will explain how inflation affects individuals, both negatively and positively, as well as how it affects the economy as a whole. We will also explore in more detail what a price index is, and how price indices are used to compute the rate of inflation.
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