Question

Some people argue that the official unemployment rate understates true unemployment, while others argue that it could actually overstate true unemployment in cases. Explain each of these positions, giving some examples of what might cause the official rate to be either too high or too low. Do you think we should make any changes to how we calculate unemployment? If so, what would you propose?

Answer 1

It is argued by some individuals that the official unemployment rate actually understates the true unemployment rate since it does not account for the discouraged workers, does not separate full time and part-time workers, and does not consider whether individuals have jobs that are low paying.

The official unemployment rate overstates the true unemployment in some cases in that it fails to capture part of the individuals who are self-employed. It classifies them as unemployed yet this is not the case. Besides, it fails to capture the unreported legal employment as well as unreported illegal employment. This makes the official unemployment rate to overstate the true unemployment.

We should change the manner in which the unemployment rate is calculated by including the unreported legal and illegal unemployment together with self-employment. Equally, the discouraged workers, part-time workers, and workers with low-paying jobs should be included in the official unemployment rate so that we can have a true reflection of unemployment.

Explanation:

Failure to account for the discouraged workers - The discouraged workers are actually not included in the official unemployment rate. They represent adults who have searched for employment at a given point in the last one, however, not within the 4 weeks before the Bureau of Labor Statistics carries out the monthly survey of the households.

Failure to separate full-time and part-time workers - Under the official unemployment rate, individuals are regarded as employed when they have temporary jobs or work part-time. Also, they are counted as employed when they possess jobs that require low skills, which they took simply to earn a living. Therefore, the unemployment rate does not take into consideration the workers` quality of jobs.

Failure to consider whether individuals have jobs that pay low wages - A number of individuals who cannot find jobs that match their skills are impelled to assume jobs that pay low wages. In fact, these underemployed individuals comprise a large sect of the workforce. However, the official unemployment rate does not acknowledge them. Thus, without addressing this issue of underemployment, the official unemployment rate offers a distorted impression of the nature of the labor markets.