The Truth Behind the Unemployment Stats | Ask an Economist

The Australia Institute

18 Aug 202305:24

Summary

TLDRThe video script by Matt, a senior Economist at the Australia Institute, critiques the outdated official unemployment rate, which significantly underestimates the actual number of Australians seeking work. The ABS measures unemployment through household surveys with strict criteria, often excluding those with caring responsibilities or discouraged job seekers. The script highlights the inaccurate depiction of labor market tightness by the RBA, which bases its decisions on these flawed figures, potentially leading to misguided policies in the face of high inflation. It suggests a broader definition of unemployment to better reflect the reality of job seeking and labor market dynamics.

Takeaways

📉 The official unemployment rate is considered to be a misleading indicator as it significantly underestimates the actual number of people seeking work.
🔍 The Australian Bureau of Statistics (ABS) measures unemployment by surveying 26,000 households, with strict criteria to be classified as 'unemployed'.
👩‍👧 Caring responsibilities, such as finding childcare, can exclude many individuals, particularly women, from being counted as unemployed.
🚫 Discouraged job seekers, who have given up on active job searching but are still interested in work, are also not counted in the unemployment rate.
🔄 The transition from employment to unemployment and vice versa often bypasses the 'unemployed' category, leading to inaccuracies in official statistics.
🕰️ The current definition of unemployment is outdated, dating back 60 years, and does not reflect modern labor market changes.
👗 The increased participation of women in the workforce and the rise of gig, part-time, and casual work have made the unemployment definition less accurate.
💼 Many workers, who appear employed in statistics due to working at least one hour a week, are actually seeking more work and are effectively 'hidden unemployed'.
🏦 The Reserve Bank of Australia (RBA) uses these inaccurate unemployment figures to assess labor market tightness and make monetary policy decisions.
💰 The RBA's focus on low unemployment to contain wage pressure may be misguided, as the real pressure on wages could be lower than official figures suggest.
🔎 A broader definition of unemployment, including those looking for work but not working, could raise the unemployment rate significantly, to as high as 12 percent.

Q & A

What is the main issue with the current definition of unemployment according to the transcript?
-The main issue is that the current definition of unemployment is based on strict and outdated criteria, which significantly underestimates the actual number of people looking for work.
Who is Matt and what is his role in the context of the video script?
-Matt is the senior Economist at the Australia Institute, and he discusses the limitations of the official unemployment rate and its implications on economic policy.
How does the Australian Bureau of Statistics (ABS) measure unemployment?
-The ABS measures unemployment by conducting phone surveys with 26,000 households, categorizing individuals as unemployed if they have been actively searching for work in the previous four weeks and are available to start work in the last week.
What are some reasons why someone who wants to work might not fulfill the ABS criteria for being unemployed?
-Reasons include individuals with caring responsibilities who cannot find childcare within a week, and discouraged job seekers who have given up on looking for a job but would be able to start work during the reference week.
What is the term used for people who are not officially categorized as unemployed but are actually looking for work?
-These individuals are referred to as 'not in the labor force' or NILF, also known as the 'hidden unemployed'.
How does the movement between employment categories differ from common expectations according to the research mentioned in the script?
-Contrary to expectations, most people who lose their job move from employed to not in the labor force, and most people who get a job move from not in the labor force to employed, indicating that the official unemployment measure is not accurate.
Why is the current definition of unemployment considered outdated?
-The definition is outdated because it was established about 60 years ago and has not accounted for significant changes in the labor market, such as the increased entry of women into the workforce and the rise of gig, part-time, and casual work.
What are the implications of underestimating unemployment for economic policy, particularly for the Reserve Bank of Australia (RBA)?
-Underestimating unemployment can lead to incorrect conclusions about the labor market's tightness, potentially causing the RBA to push for higher unemployment to contain wage pressure, which may not be necessary if the true unemployment rate is higher.
What alternative definition of unemployment is suggested in the script, and what could be the potential unemployment rate using this definition?
-The script suggests using a simple definition where if someone is looking for a job and not working, they are considered unemployed. Using this definition, the unemployment rate could be as high as 12 percent.
What does the script suggest the RBA should do to get a more accurate picture of the labor market?
-The script suggests that the RBA should look beyond the official unemployment figures and consider the bigger picture, including the underemployed and the hidden unemployed, to understand the true state of the labor market.
How does the script relate the issue of unemployment measurement to the broader economic issue of inflation and wage growth?
-The script argues that the inaccurate measurement of unemployment can lead to misguided economic policies, such as the fear of a wage-price spiral based on low unemployment figures, which may not reflect the true pressure on wages.

Outlines

00:00

📉 Flawed Unemployment Rate Measurement

The paragraph highlights the inadequacy of the official unemployment rate as a true reflection of joblessness in Australia. Matt, a senior economist at the Australia Institute, explains that the current definition of unemployment is outdated and does not account for the actual number of people seeking employment. The Australian Bureau of Statistics (ABS) measures unemployment by surveying 26,000 households, but the criteria for being classified as unemployed are restrictive, leading to an underestimation of the jobless population. For instance, individuals with caregiving responsibilities or those who have become discouraged from job searching are not counted as unemployed, even if they are willing and able to work. This misclassification results in a significant number of 'hidden unemployed' individuals being categorized as 'not in the labor force.' The paragraph also points out that the labor market has evolved significantly over the past 60 years, with more women and gig economy workers, yet the definition of unemployment has not kept pace with these changes.

05:01

🔍 The Larger Picture of Unemployment

This paragraph emphasizes the need to look beyond the official unemployment figures to understand the true extent of joblessness. It suggests that the Reserve Bank of Australia (RBA) and other entities should consider a broader perspective that includes the underemployed and the hidden unemployed. The paragraph points out that the current low unemployment rate, as claimed by the RBA's governor, does not tell the whole story. It implies that the official figures may be misleading policymakers and could result in inappropriate economic decisions. The paragraph concludes by urging a reevaluation of how unemployment is measured, suggesting that a more inclusive definition could reveal an unemployment rate as high as 12 percent, which would significantly alter the economic narrative and policy responses.

Mindmap

Keywords

💡Unemployment Rate

The unemployment rate is a critical economic indicator that measures the percentage of the labor force that is without a job and actively seeking employment. In the video's context, it is identified as an outdated measure, as it significantly underestimates the actual number of Australians looking for work. The script points out that the official rate does not account for those who are not actively searching or available to start work within a strict time frame.

💡Senior Economist

A Senior Economist is a professional who holds a high-ranking position in the field of economics, often within research institutions, corporations, or government bodies. In the script, Matt, the Senior Economist at the Australia Institute, provides insights into the flaws of the current unemployment rate measurement and its implications on economic policy.

💡Reserve Bank of Australia (RBA)

The Reserve Bank of Australia (RBA) is the country's central bank and financial authority, responsible for monetary policy, including interest rate decisions. The script discusses how the RBA's reliance on the official unemployment rate may lead to misguided economic strategies, as it does not accurately reflect the labor market's true state.

💡Inflation

Inflation refers to the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The video script connects low unemployment to the potential for higher wages and thus inflation, which is a concern for the RBA when setting interest rates.

💡Labor Force

The labor force comprises people who are either employed or unemployed but are actively seeking work. The script explains that the official unemployment rate definition excludes many who are interested in work but do not meet the strict criteria for unemployment, thus pushing them into the 'not in the labor force' category.

💡Discouraged Job Seeker

A discouraged job seeker is an individual who is interested in and available for work but has given up actively looking due to various barriers or a lack of available jobs. The script uses this term to illustrate a group of people who are not counted in the official unemployment rate because they have not actively sought work in the reference period.

💡Not in the Labor Force (NILF)

People classified as 'Not in the Labor Force' (NILF) are neither working nor actively seeking employment. The script points out that many who are actually seeking work but do not meet the unemployment criteria are incorrectly categorized as NILF, thus skewing the unemployment rate.

💡Gig Work

Gig work refers to short-term, flexible jobs that are often paid 'per gig' and do not involve a traditional full-time employment contract. The script mentions the rise of gig work as one of the changes in the labor market not accurately captured by the current unemployment rate definition.

💡Part-Time Work

Part-time work is a type of employment where individuals work fewer hours than a full-time equivalent position. The video script indicates that the growing prevalence of part-time and casual work means many are employed but may still be seeking more hours or additional work, a situation not reflected in the unemployment rate.

💡Hidden Unemployed

The term 'hidden unemployed' refers to individuals who are seeking work but are not counted in the official unemployment statistics due to not meeting specific criteria. The script uses this term to describe those who are effectively unemployed but fall outside the narrow definition used for official statistics.

💡Wage Price Spiral

A wage-price spiral is an economic phenomenon where increases in wages lead to higher prices for goods and services, which in turn lead to further wage demands, creating a cycle. The script mentions the fear of a wage-price spiral as a reason why the RBA might be concerned about keeping unemployment rates low.

💡Corporate Profits

Corporate profits refer to the earnings that remain after a corporation has paid all of its expenses, including wages. The video script suggests that the RBA's focus on wages as a driver of inflation might be misplaced, as corporate profits could be a significant factor in price increases, not just wage demands from workers.

Highlights

The official unemployment rate may not fully represent the number of Australians seeking work, as it is based on outdated definitions.

When considering a broader definition of unemployment, the number of job seekers could be more than three times the official rate.

Matt, a senior economist at the Australia Institute, discusses the impact of the Reserve Bank of Australia's (RBA) interest rate decisions on inflation and unemployment.

The ABS measures unemployment by surveying 26,000 households, with strict criteria for categorizing individuals as unemployed.

To be considered unemployed, individuals must actively search for work in the past four weeks and be available to start work in the last week.

Caring responsibilities and the inability to find childcare can exclude many women from the unemployment category.

Discouraged job seekers, who have given up on finding work but are interested and available, are also not counted as unemployed.

These individuals are categorized as 'not in the labor force' (NILF), also known as the 'hidden unemployed'.

Research shows that most people who lose their jobs move from employed to NILF, rather than becoming officially unemployed.

Similarly, many who find employment transition from NILF to employed, indicating inaccuracies in the official unemployment measure.

The current definition of unemployment has not kept pace with changes in the labor market, such as the increased participation of women and the rise of gig and part-time work.

Workers who are employed for as little as one hour a week are counted as employed, even if they are seeking more work.

Underestimating unemployment can lead to incorrect conclusions about the labor market's tightness and wage pressures.

The RBA's reliance on outdated unemployment figures may result in misguided policies to contain wage pressures.

Inflationary pressures may be attributed to corporate profits rather than higher wages, contrary to the RBA's assumptions.

A simple definition of unemployment, considering those looking for work and not employed, could yield an unemployment rate as high as 12 percent.

The RBA and other institutions should consider a broader perspective on unemployment to understand the true state of the labor market.