Unemployment

Unemployment statistics are used in a variety of situations. Users of these statistics are usually well acquainted with at least some of their deficiencies. The main issue is that the conventional definition of unemployment does not capture some major categories of the underuse of labor. These include visible underemployment (i.e., an employed person who works fewer hours than desired), invisible underemployment (i.e., an employed person whose actual working time is not used to potential), and discouraged workers (i.e., those who no longer seek work due to their perception that suitable jobs are not available). Underemployment is typically a more important issue for developing countries than it is for industrialized countries. Unemployment statistics for developing countries are also difficult to interpret because of varying definitions (see also Berry et al. 1997).

Researchers in several countries have examined some alternative definitions of unemployment that might address these shortcomings of official unemployment statistics. John Bregger and Steven Haugen (1995) discussed alternative unemployment indicators that would allow certain groups to be added to the unemployment statistics, such as involuntary and voluntary part-time workers. Aldrich Finegan (1978) examined the importance of discouraged workers and argued that they represent losses for society and for themselves that are no different from the output foregone and income lost because of unemployment. Adjusting the unemployment statistics for these deficiencies makes a substantial difference. Mark Wooden (1996) quantifies these categories for the Australian labor market, with his estimates for September 1995 revealing that only 48 percent of the underused labor hours were in the "unemployment" category, 17 percent were in the "visible underemployment" category, 28 percent in the "invisible underemployment" category, and 10 percent were in "hidden unemployment." Haugen and William Parks (1990) calculated that if all individuals "who wanted a job" had been included in the definition of unemployment, this would have increased the unemployment rate in the U.S. labor market for the fourth quarter of 1989 from 5.3 percent to 9.1 percent.

Situations where the official unemployment category counts for only around one-half of the total underuse of labor suggest that the official unemployment rate does not reflect the true state of the labor market. It also means that forecasting change in the official unemployment count will be quite difficult. In many periods, the employment effects of increases in economic activity can be absorbed by higher rates of use of the employed, or by flows into the labor market of discouraged job seekers, rather than by reductions in the official unemployment category.