23 October 2011

What the Unemployment Rate Means

Singapore's seasonally adjusted unemployment rate for residents was 3.0 per cent as at June 2011, according to Labour Market Second Quarter 2011, published by the Manpower Research and Statistics Department of the Ministry of Manpower.  The non-seasonally adjusted unemployment rate for residents was 3.9 per cent.

Most people think they know what the unemployment rate means, but it is likely that few really do.

The unemployment rate is defined as the ratio (expressed as a percentage) of unemployed persons to the total number of economically active persons.

Who are considered unemployed?

Who are considered economically active?

EMPLOYED, UNEMPLOYED AND ECONOMICALLY INACTIVE

For the purposes of labour force statistics, the resident population aged 15 years and over (including full-time national servicemen, see note 1) is divided into three distinct and mutually exclusive groups:

A. The employed
An employed person is an individual aged 15 years and over who, during the reference period: (i) worked for one hour or more for pay, profit or family gains; or (ii) had a job or business to return to but was temporarily absent because of illness, injury, breakdown of machinery at his workplace, labour management dispute or other reasons.

The reference period is the one week preceding the date of the manpower survey interview.

Clearly, working one hour in a week is hardly enough for almost any person, unless it is by personal choice.  If a person has no other remunerative work and needs to bring home some money to feed his family, he will take on almost any type of work for almost any duration, even if it is for a couple of hours only.  Governments consider such individuals employed, but hardly any one of these persons considers himself employed by any stretch of his imagination (see note 2).

Students who give tuition to other students and are paid for their efforts are employed.  Many of such student-tutors consider themselves economically inactive (see definition below), especially if their earnings are intended to supplement the allowance which their parents give them.

Finally, being employed does not necessarily mean being employed in a position that is roughly commensurate with one's qualifications and experience.

B. The unemployed
An unemployed person is an individual aged 15 years and over who: (i) did not work; (ii) was available for work; and (iii) was actively looking for a job during the reference period.  The term includes a person who was not working but was taking steps to start his own business or taking up a new job after the reference period.

An unemployed person must actively look for a job during the job search period.  Active search involves, for example, contacting a prospective employer, an employment agency, friends or relatives, sending out resumes, filling out applications, placing or answering advertisements, or checking government, union or professional registers.  Passive job search — for example, attending a job training programme or course or simply reading about job openings posted on the Internet or in the newspapers — does not have the potential to result in a job offer, and a person engaging in passive job search does not satisfy the definition of unemployed.

The job search period need not be the same as the survey reference period, and may be longer, according to the International Labour Organisation's guidelines for measuring employment, unemployment and under-employment.  In practice, most countries define the job search period in terms of the past month or the past four weeks, i.e., longer than the survey reference periodThis takes into account the time lags that may be involved in the process of obtaining work after the initial step to find it was made.  During these time lags, a person may not take any other initiative to find work.

According to Singapore's definition of unemployed (above), an unemployed person has to actively look for a job during the reference period, which is the one week preceding the labour force survey.  That is, the job search period is the same as, and coincides with, the one-week survey reference period.

If an otherwise unemployed person does not actively look for a job during the specified job search period, he is no longer unemployed — he is economically inactive, and not in the labour force.

There are individuals who are marginally attached to the labour force, for example, those who are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months.  Some of them have not looked for a job recently because they believe that there is no suitable work available or employers discriminate against them because they are too young or too old or for some other reason, or they lack the requisite qualifications, training, skills or experience, and their job search efforts will be in vain.

Though unemployed in the almost every sense of the word, such individuals do not satisfy the official definition of unemployed and are not part of the labour force; they are virtually "invisible" to most labour statisticians.  Some governments, however, acknowledge their existence and publish supplementary unemployment measures to show the broadest extent of unemployment and under-employment so that appropriate policies and programmes may be formulated to address their plight.  The US, for example, publishes unemployment measures U-4, U-5 and U-6, in addition to its official unemployment rate U-3 (see note 3).

C. The economically inactive
An economically inactive person is an individual aged 15 years and over who: (i) was not working; (ii) did not have a job to return to; and (iii) was not actively looking for a job during the
reference period.

Thus, an individual aged 15 years and over who is neither employed nor unemployed is economically inactive.

The labour force consists of the employed and the unemployed.  The economically inactive are not part of the labour force.


UNEMPLOYED BUT NOT UNEMPLOYED

Because any person can belong to only one classification — employed, unemployed or economically inactive — the correctness of the unemployment rate depends on correctly classifying every individual aged 15 years and over in the labour force survey.

Whether everyone agrees with how he is officially classified (assuming he knows) is a different matter.  As discussed above, official definitions may sometimes differ from how an individual sees his situation.  A person who is officially employed may work so few hours or may be so uncertain whether there is any work for him from week to week that he considers himself unemployed.  A person who is officially economically inactive may be merely discouraged to the extent that he has not looked for a job recently, but he considers himself unemployed.

The flip side is this.  Any individual who considers himself employed will be officially employed.  Any individual who considers himself economically inactive will be officially economically inactive, unless he happens to have worked one hour or more for pay, profit or family gains, in which case he will be officially employed.  In very few, if any, cases will any individual who considers himself employed or economically inactive be officially classified otherwise.

What this means is that there are probably more people who consider themselves unemployed than there are officially unemployed.


STATISTICAL ACCURACY

Finally, how accurate are the official unemployment rate estimates?

Statisticians obviously do not interview the entire population in conjunction with its regular labour force survey.  They draw inferences about the target population from the data collected from a sample.  Typically there is a difference between the estimated value obtained from a sample and the actual value from the population, and this is to be expected.  Such sampling error is influenced by the sample size, the sample design, the method of estimation, the variability of the population and the characteristics studied.

The non-seasonally adjusted unemployment rate of 3.9 per cent as at June 2011 was between 3.7 per cent and 4.1 per cent with a 95 per cent confidence interval (see note 4).


Non-sampling errors in surveys may be attributed to various sources, including the inability to obtain information about all persons in the sample; differences in the interpretation of questions; inability or unwillingness of respondents to provide correct information; inability to recall information; errors made in collecting and processing the data; errors made in estimating values for missing data; and failure to represent all sample households and all persons within sample households (under-coverage).

In the annual labour force survey 2010, no response was obtained from one in ten households in the initial sample (see note 5).  How did this affect the results?  Among households actually surveyed, was any one group — the employed, the unemployed or the economically inactive — more likely not to respond than the others?

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Notes

1. Although Report on Labour Force in Singapore 2010 states that full-time National Servicemen are included in the persons employed, they are excluded from some employment data.

2. The plight of the under-employed is discussed in a separate post [link].

3. Some measures of labour utilisation and under-utilisation are defined and presented in Table A-15 of The Employment Situation, which is published monthly by the US Bureau of Labor Statistics.

U-3 is the official unemployment rate (defined above).

U-4 is total unemployed plus discouraged workers, as a percent of the civilian labour force plus discouraged workers.

U-5 is total unemployed plus all persons marginally attached to the labour force (including discouraged workers), as a percent of the civilian labour force plus all persons marginally attached to the labour force.

U-6 is total unemployed plus all persons marginally attached to the labour force plus total employed part-time for economic reasons, as a percent of the civilian labour force plus all persons marginally attached to the labour force.

Note that the denominator in U-4 to U-6 is different from (larger than) the denominator in U-3.


4. A 95 per cent confidence interval with a lower limit of 3.7 per cent and an upper limit of 4.1 per cent means that the published unemployment rate has a 95 per cent probability of falling within these limits.

Seasonally adjusted estimates have a broader margin of possible error than do the original data on which they are based, because they not only are subject to sampling and other errors but also are affected by the uncertainties of the seasonal adjustment process itself.

5. In the annual labour force survey 2010, 33,000 housing units selected in the initial sample.  Of these, 1,504 households were excluded from the survey as they were unoccupied, non-residential or demolished.  29,618 households responded to the survey.  The response rate was 94.0 per cent based on households actually surveyed and 89.8 per cent based on households in the initial sample.

2 comments:

  1. What about changes in definitions? Were there many changes in definition of key terms?

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  2. I am very sceptical about our "low" unemployment rate figures put out by the government. Where did the government get the figures.? How does the government know whether I am unemployed or underemployed? People who are unemployed in Singapore will not bother to register with the authorities because they get no unemployment benefits if they do so unlike western countries with a social welfare system where the registered unemployed is entitled to some monetary benefits during the duration of his unemployment. In reality, I suspect our unemployment and underemployment figures is at least twice the figures puts out by the government.

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