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What's unemployment, again?

by Jerome a Paris Tue Jan 9th, 2007 at 04:14:55 AM EST

A good, short, paragraph from Laurent Guerby which I am translating below:

Flaws in the definition of unemployment

In the fourth quarter of 2004, the normalised unemployment rate for men aged 25 to 54 was, according to the OECD, 4.6% in the USA and 7.4% en France. At the same time, for the same group, the employment ratio was 86.3% in the USA and 86.7% in France.

We thus have an unemployment number which is 60% higher in France than in the USA even though more people work in the selected group, which is rather counter-intuitive if we expect the unemployment rate to reflect the situation of the labor market.

One should thus avoid hasty interpretations of unemployment numbers. In fact, the definition of unemployment is built on the - fragile - distinction between the unemployment of an potentially active worker his/her non-employment. Despite the best efforts to normalise this distinction, it remains heavily subjective and thus easily influenceable by various policies which have otherwise no real effect on the labor market.

As a reminder:

  • the unemployment rate is the ratio of the unemployed active to the total active population;

  • the employment rate is the ratio of the employed to the total population.


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Unemployment rates are no use for comparing economies that have different structures. They tell you nothing. Only the changes in the unemployment rate have any significance assuming there haven't been structural changes made that affect them.
by Colman (colman at eurotrib.com) on Tue Jan 9th, 2007 at 06:41:07 AM EST
but as unemployment seems to be the one big hammer used to bash the economies of continental Europe and repeat the mantra of "reform", it is a message that needs to be circulated a bit more.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jan 9th, 2007 at 07:47:19 AM EST
[ Parent ]
I haven't written about it for a while because I haven't seen it come up.
by Colman (colman at eurotrib.com) on Tue Jan 9th, 2007 at 07:49:02 AM EST
[ Parent ]
Oh I was not criticizing you. I also needed Laurent's input to write anything, without much commentary.

I was just raging against the fact that any bad number in France is used against France and for "reform", whereas bad numbers in "capitalist" countries are either ignored (if inconvenient) or explained away breezily.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 9th, 2007 at 08:10:03 AM EST
[ Parent ]
I tend to disagree: unemployment can change just by the government giving out invalidity pension to previously "unemployed" people (famously in the UK) so this kind of long run government process completely messes the value of the unemployment time serie for a given country without any "structural" change in the economy.

So unemployment has no value for:

  • comparing countries
  • analysing time variation in one country
  • describing the state of the job market in one country

Not far from useless :).

Let me quote Dean Baker (it's on my blog with links):


    Laurent,

    you are absolutely on the mark. In fact, many labor economists and increasingly macroeconomists are now arguing that the employment rate is the better measure since "unemployment," the state of not working, but actively looking for work, is ill-defined.

    As I noted before, using employment to population rations (EPOPS), the U.S. does not look better than old Europe, at least for prime age workers (source CEPR "Old Europe Goes to Work: Rising Employment Rates in the European Union").

    I should also point out that the U.S. data likely overstates EPOPs by 1.0-2.0 percentage points because people who are not employed are less likely to answer the survey (source CEPR "The Impact of Undercounting in the Current Population Survey").

    I give the media a bit more slack on using EPOPs as opposed to unemployment rates, because the switch in emphasis among economists is relatively new. On the other hand, there is no excuse for misrepresented a statistic, as the media does when it fails to note that the German unemployment rate is calculated with a different methodology.

by Laurent GUERBY on Tue Jan 9th, 2007 at 08:42:08 AM EST
[ Parent ]
To my way of thinking that sort of changing of the rules is a relevant structural change, so my point stands. In any case, those people should show up as unemployed in house-hold surveys if they're looking for jobs. But unemployment stats certainly have highly limited uses - they're really only short-term measures.

Employment rates have their own problems, but they're useful as a spectrum of measures that tell you something about the labour market.
Is the higher US employment rate among older workers a good thing or a bad thing? Why? Is taking early retirement inherently a bad thing?

Employment is ill-defined as well: when is someone considered employed?

There is no single statistic that allows us to carry out comparisons between differently structured local economies.

by Colman (colman at eurotrib.com) on Tue Jan 9th, 2007 at 08:48:45 AM EST
[ Parent ]
I'm not arguing with you that a single statistic will describe the market.

And I already said on ET what age/sex/hour worked/self-or-employee/public-private employment:population table I consider minimal to have an honest picture (this table is available to professional but not to the public AFAIK).

I'm just saying that unemployment stat is currently totally useless in OECD countries at least.

Employment can be cheated by saying "self-employed", but there's vastly less incentive (= none) to do so.

And as Dean said, I'm feeling less and less alone here.

by Laurent GUERBY on Tue Jan 9th, 2007 at 09:54:36 AM EST
[ Parent ]
Oh, I don't think you're arguing: I just can't help pontificating.
by Colman (colman at eurotrib.com) on Tue Jan 9th, 2007 at 10:02:59 AM EST
[ Parent ]
Jobs are so "last century"...

Where exactly does the growing band of "self-employed" sit in all of this?

Certainly in Scotland we see a major statistical "black hole" in this area which I refer to as "micro-enterprise".

Networks of "self-employed", and maybe the re-emergence of something not a million miles away from "guilds" is what I see on the horizon...

It leads to what Marx called the "Abolition of Labour" ie people working WITH people rather than FOR them.

 

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Jan 9th, 2007 at 10:03:38 AM EST
[ Parent ]
Self-employed receive no state aid from their status, so they don't have any real incentive to falsify their status in a confidential poll (of course for their CV and relatives that's something else :), so they don't present any source of problem for employment statistics.

As I said when ET did talk about cooperative, we have zero data or studies on cooperative (small and big) vs current "normal" corporations.

Even something as simple as the share of value-added or number of employees is not available AFAIK.

by Laurent GUERBY on Tue Jan 9th, 2007 at 12:34:01 PM EST
[ Parent ]


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