Measuring the Level of Unemployment (HSC SSCE Economics): Revision Notes
Measuring the Level of Unemployment
Understanding how unemployment is measured is essential for interpreting labour market conditions. While the concept of unemployment seems straightforward, there are several different ways to measure it, and each method has its limitations. The Australian Bureau of Statistics (ABS) conducts regular surveys to track unemployment, but economists recognise that the official statistics don't always capture the full picture of labour market challenges.
The measurement of unemployment is more complex than it first appears. Different measurement methods can produce significantly different results, and no single measure captures all aspects of labour market underutilisation.
The labour force
The labour force (also called the workforce) includes everyone aged 15 years and over who is either working or actively looking for work. This is a critical definition because it determines who gets counted in unemployment statistics.
Who is included in the labour force:
The labour force consists of two main groups:
Employed persons - people aged 15 and over who work for at least one hour per week in paid employment. This broad definition includes:
- Employees working at least one hour per week
- People on paid leave
- People on unpaid leave or stood down for less than four weeks
- Workers on strike
- Workers receiving workers' compensation
- People receiving payment while undertaking full-time study
- Self-employed people working at least one hour per week in their own business or family business
Unemployed persons - people aged 15 and over who are currently available for work and actively seeking employment.
The definition of "employed" is remarkably broad - working just one hour per week in paid employment qualifies someone as employed. This has significant implications for how unemployment statistics reflect labour market conditions.
Who is excluded from the labour force:
Several groups are not counted as part of the labour force, even though they may be of working age:
- Children under 15 years of age
- Full-time students over 15 who are not working
- People performing full-time domestic duties
- Unemployed people who are not actively applying for jobs or not available to start work
- Retired people
In 2023, Australia's labour force was approximately 14.5 million people.
The labour force participation rate
Not everyone of working age chooses to participate in the labour force. Some people may be studying, caring for family members, volunteering, or have decided not to seek employment for various reasons. The labour force participation rate measures what proportion of the working-age population is engaged with the labour market.
Definition: The labour force participation rate is the percentage of the working-age population (those aged 15 years and over) who are either working or actively seeking work.
Formula:
In mid-2023, Australia's participation rate was 67 per cent. This means that 67 out of every 100 people aged 15 and over were either employed or actively looking for work. The participation rate provides important context for unemployment figures - a falling participation rate may indicate that discouraged workers are giving up their job search, which would not show up in unemployment statistics.
Worked Example: Understanding Participation Rate
If a country has:
- Working-age population (15+): 20 million people
- Labour force: 13.4 million people
Then:
This means 67% of the working-age population is either employed or actively seeking work, while 33% are not participating in the labour market.
COVID-19 Impact on Participation
The participation rate fell sharply during the COVID-19 lockdown in mid-2020, dropping by around 4 percentage points as many people stopped actively seeking work when businesses closed. By mid-2023, it had recovered to pre-pandemic levels.
Unemployment
Unemployment statistics specifically measure people who want to work but cannot find employment. To be counted as unemployed, a person must not only be without work but must also be actively seeking employment.
Definition: Unemployment refers to a situation where individuals want to work but are unable to find a job. This represents unutilised labour resources in the economy.
Criteria for being classified as actively seeking work:
To be counted as unemployed, a person must satisfy at least one of the following criteria:
- Regularly checking job advertisements from different sources
- Responding to job advertisements, applying for jobs and attending interviews
- Registering with an employment agency linked to Workforce Australia
How unemployment is measured:
The Australian Bureau of Statistics conducts a monthly Labour Force Survey of approximately 26,000 dwellings. From this survey, the ABS calculates both the total number of unemployed people and the unemployment rate.
Formula:
In June 2023, Australia's unemployment rate was 3.5 per cent, just above its lowest level in almost 50 years.
Worked Example: Calculating the Unemployment Rate
If a country has:
- Labour force: 14.5 million people
- Number unemployed: 507,500 people
Then:
This means 3.5% of people in the labour force are actively seeking work but unable to find employment.
Problems with the method used to measure unemployment
While the official unemployment rate provides useful information, it has significant limitations. The traditional classification of people into three categories - employed, unemployed, or not in the labour force - does not capture the full extent of labour market underutilisation. There are two main problems with official unemployment statistics.
Critical Limitation
The official unemployment rate only tells part of the story about labour market health. It misses both people who are working but want more hours (underemployment) and people who have given up looking for work (hidden unemployment).
Problem 1: Underemployment is not captured
The official unemployment measure treats all employed people the same, regardless of how many hours they work. Someone working just one hour per week counts as "employed", the same as someone working 40 hours per week. This creates a significant blind spot.
Underemployment occurs when employed people are working fewer hours than they would like and are available to work more. If a full-time job were split into four part-time positions of 10 hours each, this would create three additional "employed" people and reduce the official unemployment rate, even though total hours worked remained unchanged and no additional economic activity occurred.
Example: The Underemployment Problem
Consider this scenario:
- A business employs one person full-time (40 hours/week)
- The business restructures and employs four people part-time (10 hours/week each)
Impact on statistics:
- Total hours worked: Same (40 hours)
- Number employed: Increases from 1 to 4
- Unemployment rate: Falls (three more people now "employed")
- Actual economic activity: Unchanged
This example shows why the official unemployment rate can be misleading when underemployment increases.
COVID-19 Highlighted This Issue
The COVID-19 lockdowns in 2020 highlighted this issue. Much of the labour market impact appeared as increased underemployment rather than unemployment. By April 2020, around 767,000 people were "employed" but worked zero hours (although this was temporary, falling to just 57,000 a year later).
Problem 2: Hidden unemployment is not captured
The official measure also excludes people who have stopped looking for work because they believe no suitable jobs are available. These "hidden unemployed" or "discouraged jobseekers" are counted as not in the labour force, even though they would work if suitable employment were available.
This group may include:
- Family members performing home duties who would prefer to work
- Students who would rather be employed
- People with disabilities who would accept suitable employment if offered
The COVID-19 Hidden Unemployment Surge
During the early stages of COVID-19, this limitation became particularly apparent. Between March and May 2020, 1.3 million people lost their jobs, but the official unemployment count only increased by 105,000. Around 500,000 people left the labour force entirely because they saw no point seeking work when so many businesses were closed.
Alternative measures of labour underutilisation
To address these limitations, the ABS publishes several broader measures:
Labour force underutilisation rate: This adds together the unemployed and the underemployed (those wanting more hours). In mid-2023, this rate was 10 per cent, down from a peak of 20.1 per cent during the COVID-19 recession in May 2020.
The underutilisation rate provides a more complete picture than the unemployment rate alone, as it captures both people without work and people who want to work more hours than they currently do.
Extended labour force underutilisation rate: This measure includes two additional groups who are marginally attached to the labour market:
- People actively looking for work who can start within four weeks but not within one week
- Discouraged jobseekers
This broader measure shows that official unemployment statistics capture less than half the number of people who are short of work.
Hours-based labour underutilisation rate: This measure, developed by the Reserve Bank during COVID-19, provides the most accurate picture of spare capacity in the labour market. Instead of simply counting unemployed and underemployed people, it calculates the total hours that these groups want to work and converts this into full-time equivalent positions.
Why Hours-Based Measurement is More Accurate
This is more accurate because unemployed people typically want to work three times as many hours as underemployed people. In June 2020, underutilised hours totalled 57 million hours per week, representing an hours-based underutilisation rate of 6.3 per cent - much lower than other underutilisation measures.
Key Points to Remember:
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Labour force = employed + unemployed: Only people working or actively seeking work aged 15+ are counted
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Key threshold: 1 hour per week: Working just one hour qualifies someone as employed, which can mask underemployment issues
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Participation rate matters: A falling participation rate may hide unemployment as discouraged workers leave the labour force
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Official statistics understate labour market problems: Underemployment and hidden unemployment mean the true extent of unused labour capacity is greater than the unemployment rate suggests
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Alternative measures provide fuller picture: Labour force underutilisation rates and hours-based measures reveal more about spare capacity in the labour market