FA_p04-09 Vol4-4 Mission Impossible

SKILLS CONTENTBUSTER ESSAYS ARTICLES

FEATURE

IMPOSSIBLE?

Unemployment rates are one of the key macroeconomic indicators that governments report in the media during economic booms and

recessions. We refer to the total or aggregated unemployment rate in this article. It is also an indicator of great interest to the public, as it directly concerns the purchasing power of people walking down the street and their satisfaction levels. From the perspective

4 THE UNEMPLOYMENT ISSUE THE UNEMPLOYMENT ISSUE 5

Who is considered unemployed? How does a country calculate its unemployment rate? Why is it so important to calculate unemployment figures? What are the problems encountered in gathering unemployment data on a macro level. What are the problems created from the challenges faced in gathering unemployment data?

KEY POINTS OF QUERY

MACROECONOMICS

IMPOSSIBLE?COUNTING

UNEMPLOYMENT

Since unemployment figures are so important in assessing the state of an economy, it is important for us to have a better understanding of how such figures are tabulated within each country.

of the scarcity issue, unemployment rates shed some light on the extent to which labour resources in a country are utilized. It can also shed some light on the growth in output in a country, since labour is commonly known as a derived demand, contingent on the changes in demand in the goods market. All the above issues pertain to measuring the performance of one single economy. Unemployment rates are also used for international comparisons by foreign investors or by politicians to justify their policy outcomes and performance against a global background.

We would imagine that the most accurate way of calculating unemployment is to ask every single person in the country his or her employment status at any one time. This would be the most ideal case, but probably not the most economically feasible in terms of the time spent and the monetary costs involved in the data collection. Hence the most common approach internationally is to calculate unemployment rates by conducting labour surveys every month or quarterly.


Who to survey? By geographical location and other social, economic criteriaIn the case of the United States (US), the Bureau of Labour Statistics (BLS) conducts a monthly labour survey called the Current Population Survey (CPS). BLS carefully selects a sample of the total population to interview about their employment status. The sample is chosen with the goal of being representative of the whole country. In the case of the US, with a huge geographical land space, the country is further divided into approximately 2,025 areas or sampling units. By a given set of criteria, BLS further selects a sample of 800 over units to be representative of each state and the District of Columbia. Hence, a robust criteria of choice should reflect urban areas, rural areas, various major industrial areas, and farming areas. These 800 over sampling units or geographical areas consist approximately 60,000 households. This in turn translates into approximately 110,000 individuals who are surveyed monthly.

How to retrieve household responses? The BLS adopts a fairly personalized approach in the survey. Every month, 2,000 highly trained and experienced employees go to the selected households in person to carry out the survey. In some cases, the survey is carried out over the phone. Only members of the household more than 15 years old are surveyed. After collating the responses to a fixed set of questions, the interviewers key in the responses from the households into a database managed by the Census Bureau headquarters in Washington, DC.

How can the results from a sample size be a representation of the whole country? Quoting from a report by BLS, ‘Each person is classified according to the activities he or she engaged in during the reference week (the week that the survey was carried out). Then, the total numbers are “weighted” or adjusted

to independent population estimates. The weighting takes into account the age, sex, race, Hispanic ethnicity, and state of residence of the person, so that these characteristics are reflected in the proper proportions in the final estimates (of unemployment rate)’.

What are some principles in designing the survey questions? Ideally, the questionnaire should ask factual questions with as little need for interpretation as possible. Hence, in the US respondents do not make a judgment on their own as to whether they are employed or not. They go through a range of questions that illicit some basic data about their activities and the judgment about their employment status is defined according to definitions programmed into the computer software at the central bureau level.

A SAMPLE OF THE MAJOR QUESTIONS INCLUDES: 1. Does anyone in this household have a

business or a farm? If Yes, go to Q22. LAST WEEK, did you do ANY work for pay? If

No, go to Q33. LAST WEEK, did you do any unpaid work in

the family business or farm? For those who reply ‘no’ to both Q2 and Q3, the next key questions used to determine employment status are:

4. LAST WEEK, did you have a job, either full or part time? Include any job from which you were temporarily absent.

5. LAST WEEK, were you on layoff from a job? 6. What was the main reason you were

absent from work LAST WEEK? If Yes to Q5, the following questions are asked.

7. Has your employer given you a date to return to work?

8. Have you been given any indication that

you will be recalled to work within the next 6 months? If the responses to either question 7 or 8 indicate that the person expects to be recalled from layoff, he or she is counted as unemployed.

9. Have you been doing anything to find work during the last 4 weeks? For those who say

‘yes,’ the next question is:10. What are all of the things you have done

to find work during the last 4 weeks? 11. LAST WEEK, could you have started a job if

one had been offered? If there is no reason (except temporarily illness) that the person could not take a job, he or she is considered to be not only looking but also available for work and is counted as unemployed.

How is Singapore different from the US? In Singapore, labour surveys are also conducted on the same principle of selecting a sample size that is representative of the whole country. However, unlike the United States and even European Union countries, Singapore’s Ministry of Manpower conducts the bulk of the survey via the Internet instead of face-to-face interviews. This implies that respondents are left independently to answer the online questionnaire. Alternative provisions are made for respondents who are unable to complete the survey online. The other key difference is related to the question design. As mentioned earlier, the US question survey was designed to illicit primary data about the person’s activities. The person being interviewed does not participate in making the judgment about their employment status. However, in the Singapore questionnaire, the respondent has to judge their own employment status according to the definitions provided in order to decide which questions are relevant to them. Turning to an online solution to collecting data saves the costs of employing and training manpower to conduct the face-to-face surveys. Singapore also has the advantage of advanced communication infrastructures in order to use this method.

Each country has its own refinements to the definition of employment, unemployment, and the age parameters in its labour force. For the sake of this article, we will focus on the approaches used in the United States and Singapore to calculate unemployment rates.

THE NUTS AND BOLTS TO CALCULATING UNEMPLOYMENT RATES

An example of this would be: if the interviewee is a person age 35 and that age group makes up 20% of the population, the weight attached would reflect that the respondent’s responses would make up that portion of the total calculation.


FEATURE


Design of survey questions In principle, survey questions must help categorize the employment status of the people accurately—namely, employed, unemployed, and not in the labour force. Assuming all factors remain constant, a survey questioning those illicit primary responses without requiring additional interpretation by the respondent is more likely to be accurate. However, given that the literacy level is relatively high in Singapore, it is less likely for people to misinterpret the definitions of employment concepts provided by the Ministry of Manpower. To some extent, people who have access to computers and are able to use them largely correlate with a competent literacy level. Others who have no access to computers or are unable to use the online platform would be able to do the interview on the phone with assistance from someone.

Discouraged workers effect On close examination of the survey questions in the US, question 9 is the deciding factor to categorize people with no work as unemployed or out of the labour force. This has to do with the definition of the unemployed, which reads in the US, ‘People who are jobless, looking for work and available for work are unemployed’. Hence, when either part of this definition is not fulfilled, the person is either employed or out of the labour force.

The discouraged worker effect will have implications on the underlying reason why the respondent may not be looking for work. The person may have

been looking for work for a considerable period of time, but after many instances of rejection, the person stops looking because they are discouraged and see little chance in getting a job in the future. In this case, the respondent would reply ‘No’ to question 9 and hence be categorized as someone out of the labour force and will not contribute to the unemployment statistics. However, though the worker is technically not searching for a job, the truth of the matter is that the person was diligently looking for a job before the survey was conducted. This is of greater issue during severe and prolonged recessions, where the incidence of discouraged workers is higher. Hence, the unemployment rates officially gathered may be understated.

This might be overcome by having more qualitative questions in the

survey to illicit the underlying intention of the person’s job seeking status. However, other problems will arise when interviewers have to make a normative judgments about whether the respondent falls under the category of a discouraged job seeker. Similarly, inaccuracies can arise from diverse interpretations on a case-by-case basis. With the sheer large sample size, some uniformity and structured questions with conclusive answers such as ‘Yes’ or ‘No’ would still be important towards achieving an accurate picture of the employment activities for the bulk of respondents.

Part-time work optionsTypically, when there is an economic downturn some employers give employees part-time work options instead of working full-time. Employers

CHALLENGES TO CALCULATING AN ACCURATE UNEMPLOYMENT RATE

Using that definition, even if a person is not looking for work, he or she does not qualify to be counted as part of the unemployed labour force.

MACROECONOMICS


then prefer to hire new workers on a part-time basis, which also tends to be contract in nature and enables employers to be more responsive to changes in demand in the goods market. Hence, workers who work part-time will say yes to question 4 in the example of the US survey. Technically, this group of people will contribute to the employment statistics and make the unemployment rate lower. However, if a person was willing to work full-time but couldn’t find full-time work and settled for part time, it clearly reveals that the unemployed labour resources in terms of man hours are higher than what is revealed in the total unemployment rate. Thus, total unemployment rate on its own may not be a good indicator for the economic issue of labour resource utilization.

The ‘Black Economy’ The black economy is the aspect where financial contracts are not declared and are not taxed. It can be legal work that the state is not informed about or it can be the engagement in illegal work. Whilst this issue may not be of great relevance to a country like Singapore, it is of significance to developing countries. For example, in the case of Lithuania, 4 out of 10 people in the country may be involved in the black economy. In such a case, the people surveyed may report as not having worked in the last week, but in fact they were contributing to productive work in the economy, regardless of whether they were legal or not. Hence, the unemployment

HOWEVER, THOUGH THE WORKER IS

TECHNICALLY NOT SEARCHING FOR A JOB, THE TRUTH OF THE MATTER IS THAT THE

PERSON WAS DILIGENTLY LOOKING FOR A JOB BEFORE THE SURVEY WAS CONDUCTED.


FEATURE


JOURNAL ARTICLES Ministry of Manpower. (2011). Singapore Yearbook

of Manpower Statistics. Singapore: Manpower Research and Statistics Department.

Pocius, L. O. (2011). Trends of Hidden Employment in Luthuania and Problems in Methodical Calculations. Technological and Economic Development of Economy, 17(3), 484-500.

U.S. Bureau of Labour Statistics. (2009). How the government measures unemployment. United States: U.S. Bureau of Labour Statistics.WEBSITES

http://ingrimayne.com/econ/Measuring/Unemployment2.html

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=unemployment+rate,+measurement+problems

Sample of Singapore Labour Force Survey Questions: http://www.mom.gov.sg/Documents/statistics-publications/survey/mrsd_CLFS_survey_qns_at_a_glance_160512.pdf

REFERENCESrates stated might be overstated. Alternatively, the respondent could report that there was work done in the last week, which was in the informal economy. This could therefore understate the potential resources that were still largely untapped because workers in the informal economy could have been utilized to a greater extent (such as longer man hours and more structured and consistent forms of employment) in the formal economy. Therefore, standard labour force surveys may give rise to unemployment statistics that don’t give an accurate representation of resource utilization in the economy.

However, research has also shown that efforts have been made to conduct labour surveys of a different kind that help to

approximate the number of workers in the black economy. The results of such a survey reported the following results:

As awareness of the black market and/or informal economy combined with a knowledge of the unemployment statistics (gathered via traditional means) might enable the government to design policies to encourage more workers to enter the formal economy job market.

The following figure provides a summary on how other changes in data collection processes can have a considerable impact on the final statistical results for unemployment. KEY:a. Definition of unemployed revisedb. Survey redesigned

CLEARLY, UNEMPLOYMENT

RATES ALONE MAY NOT BE A RELIABLE INDICATOR

OF A COUNTRY’S ACTUAL ECONOMIC PERFORMANCE.”

c. Definition of working age population revised

d. Reference period revisede. Geographic coverage revised

Conclusion Having an awareness of the actual data collection process as well as the common challenges faced by labour statistical bureaus in different countries equips us to think critically about the unemployment rates we encounter in the media and in our academic work. Clearly, unemployment rates alone may not be a reliable indicator of a country’s actual economic performance. However, it can still be useful for comparing performance across time, as long as the methodologies for a particular country don’t change.

FIGURE 1

FIGURE 2 HOW CONCEPTS AND METHODOLOGY AFFECT RESULTS

MACROECONOMICS
