What is the unemployment rate?

So last week there was some talk that the ‘real’ unemployment rate might be as high as 9.3%. A few years ago my RMIT colleague Ashton de Silva and I worked out an alternative measure of unemployment.

The last 15 years or so have seen massive changes in work practices in Australia. The very notion of a full-time job has been challenged. The idea that someone works 7.2 hours per day for (about) 254 days a year is still the norm but there is far more diversity in employment now than there ever was before. This is all good.

Unfortunately, it makes historical comparisons difficult. There are more people with part-time jobs and it is difficult to compare that over time. Some people are very happy to work part-time, while others would prefer to work more. Of course, many full-time employees would like to work less. The point being that diversity makes generalisation difficult.

To try to better understand what is happening in the labour market we have been looking at the ABS series on Aggregate Hours Worked (table 19 Cat. 6202). At present that figure is at the long-run trend. What we have done is create a variable we call the “effective full time unemployment rate”. We calculate this making the assumption that all employees are full-time workers who work 7.2 hours per day for 254 days per year. We are able to calculate the number of full-time employees that would generate the total number of hours worked. By comparing this to the ABS data on the size of the Labour Force we are able to calculate what the unemployment rate would have been if all workers were full time employees.

Ash has updated the data using the latest ABS data on hours worked.

Below is an update of the national EFUR together with some detailed analysis at the state level. An important thing to keep in mind when looking at the following graphs is that the EFUR is a relative measure – it is not an absolute measure. In other words it should be interpreted relative to its past.

According to Chart 1 the EFUR indicates that national labour market conditions are worse than the pre-GFC conditions of the mid-2000s. In particular the EFUR seems to be hovering at rates consistent with the experience of the early-mid 1990s and 2001. The standard unemployment rate at these times was around 10 per cent and 7 per cent respectively. No doubt some of the difference between the alternative measures is attributable to changes to working conditions.

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15 Responses to What is the unemployment rate?

  1. Uber

    This is a classic example of how more flexible workplaces benefit everyone. Work hours are down, but unemployment remains low thanks to flexible hours. Surely its better to have a higher participation rate working lower average hours than to have people without livelihoods. Not only that but when the economy picks up those people will be ‘shovel ready’ to increase their work loading. This is a blow to collective unionism.

  2. brc

    @uber : indeed. More flexibility in the workplace benefits workers in times of boom and bust. if the Labour supply is rigid, as soon as it dips below the minimum viable level, the employee loses the employment. When flexible, it can be reduced.

    Similarly, when the obligatory socialist government gets turfed out again, and business confidence improves, then said employees can be ramped up with no administrative overhead.

    The only people who lose with flexible hours are unions and employment agencies.

  3. Helen Armstrong

    I hadn’t thought of flexible hours like that before, but it makes sense. Things are tight, less hours but still a job, things are fired up opportunity for more hour if you want them.

    I have this feeling though, the government have been riding on the coattails of the low employment figures by failing to recognize the people who are actually under employed (that is who would actually like more hours.

    Maybe a different method of reporting unemployment is needed?

  4. m0nty

    What was the cause of the shift from 2000, where the two graphs almost touch, to 2001, where the EFUR jumps to around double the standard rate?

  5. maurie

    Our union/ALP combine has always been against individuality in the workplace – they depend on employees acting like monkeys – all being paid the same because that is easier for the unions. Exactly the Russian/Chinese plan where lazy people are paid the same as productive employees. For an example just take a peek at the public service where long service is really good! Unfortunately the mining industry has a lot of young people in management & don’t yet understand that inviting unions into their enterprise is costlier than just paying a competitor a set sum each period. So methods of describing unemployment rates are unlikely to be recalculated any time soon.

  6. Chris M

    I can’t figure out how the ABC calculates their employment numbers?

    As an employer in a small business like thousands of others the government / ABS has no month to month clue who I employ and who I lay off. They can see the group certificates at the end of the FY but they still don’t know if those people were employed part time or full time. I’ve often wondered how they come up with their figures – beyond the number of people registered for unemployment benefits of course.

  7. Jack

    Chris M – based on nothing more than a smallish sample ! That is why people in the real world know things are a lot tougher on the employment front than the ivory tower technocrats in the RBA (to nam one govt. body).

  8. Jim Rose

    Prescott distrusts the unemployment rate so much that he uses hours worked per working age person

    “The word ‘unemployment’ is not an economic term. I don’t use it”

    at http://research.barcelonagse.eu/Barcelona_Research_Community_Videos.html?video=201&grupo=27

  9. Jarrah

    “What was the cause of the shift from 2000, where the two graphs almost touch, to 2001, where the EFUR jumps to around double the standard rate?”

    Probably the tech-wreck recession, and employers opting to reduce hours rather than workers.

  10. Mike a.

    I tend to think Chris M. Is on the right track. Quite a few people in my extended family draw unemployment benefits while working cash in hand or while their husbands work overseas. Based on that I’d say the actual unemployment rate is lower than the official one.

  11. Rodney

    In 1960 there were 80k people on the invalid pension. There are now 800K plus. The population has increased about 2.5 times. there are about 500,000 people on the DSP who are employable but have been regulated out of work.

  12. Rafe

    What about the effect of people dropping out of the search for employment and lowering the denominator? Has anyone suggested a way to estimate that factor?

    @Mike a. that is the kind of thing which in the US results in the finding that many “low income” households report far more expenditure than their nominal or official income.

    Studies of expenditure and also the assets of “poor” people in the US suggest that their numbers are inflated by the State welfare industry to justify their own existence and to promote Big Government generally.

  13. John Mc

    Studies of expenditure and also the assets of “poor” people in the US suggest that their numbers are inflated by the State welfare industry to justify their own existence and to promote Big Government generally.

    For what it’s worth, it’s also interesting to look at things like mobile phone ownership, number of registered vehicles owned, the amount of holiday travel taken, or obesity levels in the socio-economic groups that might be labeled as “poor”. The USA is unlike anywhere else in the world.

  14. Winston Smith

    I assume Mike a, that you’ve spoken to Centerlink about these thieves?

  15. Harold

    I’ve read the ABS use a random survey to work it out, though I’d expect someone here to know conclusively how it’s done. Surely most cash in hand workers aren’t stupid enough to confess their income to a random stranger over the phone, or even worse one identified as a public servant.

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