Question

What problems does the Bureau of Labor & Statistics face in measuring unemployment?

Discuss the three problems that make the consumer price index and imperfect measure of the cost of living.

Answer 1

The BLS faces several problems while measuring the unemployment. The major issue being the under reporting of unemployment. The issues are discussed below:

1. It is very difficult to identify and account for discouraged workers. Discouraged workers are the ones that are willing to work but has stopped looking for jobs. Since they are difficult to account, they are not included in the labor force.
2. BLS cannot account for the quality of work or part-time or full-time employment. People are considered as employed if they have temporary jobs or part-time jobs.
3. It cannot consider the time of unemployment. People can be unemployed for 27 weeks or 36 weeks. This difference is difficult to account for.
4. It is difficult to account for people working in the informal sector.

CPI is calculated by using a fixed basket of goods and services that are important to a typical consumer. It does not reflect the true measure of cost of living due to three major reasons –

1. Substitution bias: The basket of the consumer remains fixed over the years. However, in reality, when one good becomes cheaper, consumers switch to that good and are better off. This is not captured in CPI.
2. Introduction of new goods are not accounted. The basket remains fixed.
3. If the quality of goods in the basket becomes better or gets worse, this will not be reflected using CPI as only money value is measured.