Chapter 17: Unemployment: Meaning and Measurement

Measuring Unemployment

• the unemployed are generally defined as those who are not currently employed and
who indicate by their behaviour that they want to work at prevailing wages and
working conditions
• the primary source of unemployment data is the Labour Force Survey, carried out
monthly by Statistics Canada
o for the most recent release of the Labour Force Survey, click on:
http://www.statcan.ca/english/Subjects/Labour/LFS/lfs-en.htm
• the labour force consists of the employed plus the unemployed, and the
unemployment rate is defined as the number of unemployed divided by the labour
force
• according to the Labour Force Survey, persons are classified as:
o employed if they did any work, including unpaid work on a family farm or
business, or if they normally had a job but were not at work because of such
factors as bad weather, illness, industrial dispute, or vacation
o unemployed if they did not have work in the reference week but were available
for and searching for work
ƒ two exceptions to this principle are those on temporary layoff from a
job to which they expect to be recalled and those with a job to start
within the next four weeks
o out of the labour force if they are not employed and are not searching for work
(examples include full-time students and retirees)
• the number of Unemployment Insurance (UI) claimants, an alternative unemployment
data source, differs from the number of unemployed in the Labour Force Survey for a
variety of reasons
o the number of UI claimants may exceed the number of unemployed in the
Labour Force Survey because some people collecting UI may not search for
work (for example, persons on maternity or sick leave and seasonal workers
who collect UI for part of the year)
o the number of UI claimants may be less than the number of unemployed in
the Labour Force Survey because not all unemployed persons are eligible for
UI (for example, new job seekers, the self-employed, and long-term
unemployed who have exhausted their UI benefits)

The Canadian Experience

• as illustrated in Figure 17.1, Canada's unemployment experience has varied widely

 o the onset of the Great Depression in the 1930s saw the unemployment rate
soar from about 3% to almost 20%
o during World War II unemployment fell to very low levels
o the post-World War II period has been characterized by cyclical variations
around a general upward trend; during the severe recession of 1981–82 the
unemployment rate reached 11.8% (the highest since the Great Depression),
fell back to 7.5% during the economic recovery of the late 1980s, climbed
back over 11% during the recession in the early 1990s, and then declined to
6.8% in 2005 (the behaviour of unemployment since the mid 1990s suggests
that the upward trend may have ended)
• while the unemployment rate is the most commonly used measure of labour activity,
two additional measures are the employment rate (the fraction of the adult population
employed) and the labour force participation rate (the fraction of the adult population
in the labour force)
o for recent monthly Canadian and provincial data on the unemployment rate,
the employment rate, and the labour force participation rate, click on:
http://www.statcan.ca/english/Subjects/Labour/LFS/lfs-en.htm
o for recent annual data on the unemployment rate, the employment rate, and
the labour force participation rate, click on:
http://www.statcan.ca/english/Pgdb/econ10.htm
• because they focus on somewhat different aspects of labour market activity, the
unemployment rate, the employment rate, and the labour force participation rate need
not always move together
• since 1966 the unemployment rate has risen substantially, but the labour force
participation rate and employment rate have also risen, not fallen (see Table 17.1)
 o during the 1966-81 period, the growth in the labour force exceeded the
growth in employment
o during the 1980s and onwards, and particularly during the 1990s, the growth
in employment fell substantially

Hidden Unemployment and Underemployment

• hidden unemployment or "marginal labour force attachment" refers to situations in

which individuals may be without work and desire work, yet they are not officially
classified as unemployed because they are not searching for work
• an important example of hidden unemployment is the phenomenon of the
"discouraged" worker: an individual who is not employed, who wishes to work at
prevailing wages but is not seeking work because s/he believes that no work is
available
o as shown in Exhibit 17.2 on pages 522-23, including discouraged workers (the
R5 unemployment measure) increased the unemployment rate by 0.1
percentage points in 2005
• other examples of hidden unemployment include individuals awaiting recall after more
than six months on layoff and individuals waiting for potential or promised jobs to
become available
o as also shown in Exhibit 17.2, including a "waiting" group (the R6
unemployment measure) adds an additional 0.6 percentage points to the 2005
unemployment rate
• examples of underemployment include individuals working fewer hours than they
desire to work (in 2005, included the involuntary part-time expressed in full-time
equivalents increased the unemployment rate from 6.8% to 8.9%) and those
temporarily employed in jobs that do not utilize their skills or training
• the major lesson is not that the official unemployment rate is a poor measure of labour
activity, but rather that no single measure of unemployment is likely to be suitable for
all purposes
 o for many purposes the official unemployment rate will be appropriate;
however in other situations it should be supplemented by measures of hidden
unemployment and underemployment; Statistics Canada publishes several
"supplementary measures of unemployment" (see Exhibit 17.2 on pages 522-
23)

Labour Force Dynamics

• the Labour Force Survey provides a snapshot at a point in time, an estimate of the
stock of persons in each labour force state; however, even if the magnitudes of these
stocks remain approximately constant from one period to another, it would be a
mistake to conclude that little change had taken place in the labour force
• Canada's labour market is highly dynamic; as shown in Figure 17.2, gross flows
between the three labour force states (employed, unemployed, and out-of-the-labour
force) are large in comparison to the stocks in each state at any point in time, and
huge in comparison to the net flows

o many individuals unemployed in one month are no longer unemployed in the

next month: about 22% obtain work in the next month and about 17% no
longer seek work
• as shown in Table 17.2, unemployment does not consist almost exclusively of
individuals who lost their job, either temporarily or permanently
 o job losers account for only 40 to 50 per cent of flows into unemployment, with
the proportion being highest in recessions
o the remainder is accounted for by job leavers (10 to 20 percent) and new
entrants and re-entrants (25 to 35 percent)
• the incidence and duration of unemployment are useful concepts for understanding
unemployment dynamics
o for any group of workers, incidence refers to the probability of a member of
the group becoming unemployed, while duration measures the length of time
the individual can expect to remain unemployed
o in a steady state, the unemployment rate can be expressed as the product of
incidence and duration
o Table 17.3 shows the breakdown of the unemployment rate into its incidence
and duration components; the average duration of unemployment in an
average year is approximately 4-1/2 months, with less than half of all
unemployed spells lasting more than 3 months
• as shown in Table 17.4, the age groups with the highest unemployment rates have the
shortest average unemployment duration, but the highest incidence of unemployment
 o young workers have much higher unemployment rates than adults, but lower
average duration of unemployment; the high youth unemployment rates are
due to the high probability of becoming unemployed in any period
o the incidence and duration of unemployment are very similar for men and
women, as are their unemployment rates
o for recent annual data on the unemployment rate, the participation rate, and
the employment rate by age and sex, click on:
http://www.statcan.ca/english/Pgdb/labor20a.htm

Changing Perspectives on Unemployment

• during the 1970s the traditional view that the unemployed were mainly an unchanging
stock of individuals without work for a lengthy period was challenged by a "new view"
that emphasized the importance of employment instability and turnover in the labour
market
• subsequent research modified this "turnover" view by noting that although the
average duration of unemployment is fairly short, much of total unemployment is
nonetheless accounted for by those experiencing long spells of joblessness;
furthermore, many unemployed spells end in labour force withdrawal rather than in
employment suggesting that unavailability of suitable employment is a reality for some
workers
• in Canada, the 1980s and 1990s have been dominated by cyclical developments: the
deep recessions of 1981–82 and 1990–92 and recovery from these downturns
o these two recessions, the worst of the post-war period, saw sharp increases in
both the incidence and the duration of unemployment, but both declined
substantially during the subsequent expansions
o in contrast, in many European countries, increases in unemployment persisted
and the incidence of long-term unemployment grew dramatically (see Table
17.5)
The Divergence of the Canadian and U.S. Unemployment Rates

• as shown in Figure 17.3, unemployment rates in Canada and the United States
behaved very similarly during most of the post-war period, but diverged in the 1980s
and 1990s
 • differences in the way unemployment is measured account for about 0.8 to 0.9
percentage points of the unemployment rate gap (in the U.S. a "passive" job searcher
is not counted as an unemployed person, and in the US the age of the sample
commences at 16 years whereas in Statistics Canada’s Labour Force Survey, it is 15
years of age)
• most of the unemployment gap is due to a relative increase among Canadians in the
fraction of non-employment time spent searching for work (rather than out of the
labour force), compared to that of Americans
• the emergence of the unemployment gap was also associated with a decline in the
incidence of unemployment in the United States relative to Canada
• to compare the unemployment rate and labour force participation rate (by age and
sex) for Canada, the United States and other countries, click on:
http://www.statcan.ca/english/Pgdb/labor23a.htm

Unemployment Rate as a Summary Statistic

• while the unemployment rate is widely used as an indicator of the amount of unutilized
labour supply, the state of the labour market and economy, and the degree of
hardship in the population, it is unwise to rely on the unemployment rate alone for
each of these purposes
o for example, an unemployment rate of 6% is not likely to indicate the same
degree of labour market tightness and state of the economy today as it did in
the 1950s and 1960s
• it is particularly important to consider additional measures for the degree of hardship
o many of the unemployed are part of families in which one or more other family
members are working
o the unemployment rate is uninformative about the earnings levels of the
employed and the degree to which they may have fallen below the poverty
level