Question

Does the official unemployment rate overstate the true level of unemployment, understate the true level of unemployment or accurately measure the true level of unemployment? Be certain to clearly and carefully explain your answer.

Answer 1

The official unemployment rate imperfections fell into 2 groups. One that suggests the "real" unemployment of labor resources is probably higher than the official rate of unemployment and the other that indicates the "actual" unemployment of labor resources is probably lower than the official rate of unemployment. Two things which appear in the understated group are workers depressed and part-time employees. Two things that occur in the overestimated group are unreported legal work and undeclared illegal jobs.

Discouraged Employees: Discouraged employees are people who are eager and able to work, and will happily accept jobs, but because they have not been successful in finding a job they have voluntarily given up searching for a job.
A person has to be actively pursuing work to be officially counted as unemployed. Once the BLS tabulates the official rate of unemployment, the unemployed workers are put in the group "not in the labor force." If they are not legally considered unemployed and are not considered part of the labor force, they are therefore not included in the estimation of the official unemployment rate. Such disgruntled workers, however, potentially reflect jobless capital.

Unreported legal employment: Government transfers (particularly unemployment insurance and welfare) are focused on recipient needs. Working citizens are usually not entitled to receive such benefits (or are receiving reduced benefits). Some people receive such transfer payments by fraudulently "neglecting" to tell officials about their actual work. Although their work is legitimate, it is not fraudulently receiving transfer payments.

In comparison, in the context of changes in the economic cycle, the issues of unemployed employees and part-time workers appear to be much less prevalent. With more jobs available, individuals are less likely to become depressed or be pressured into part-time employment. Nonetheless, the economic upturn is more likely to influence the underground economy, and those who seek to receive transfer payments fraudulently. A greater number of employees pretending to be unemployed during an expansion can very well earn income from other employment, whether legal or illegal.

The real unemployment rate is likely to fluctuate more than publicly stated over the course of the business cycle. When the unemployment rate rises during a recession it is undoubtedly higher than recorded officially. And as the unemployment rate during an expansion decreases, it is likely lower than officially reported.