Question

. How does the government officially measure employment and unemployment in the economy? Why is it usually stated that the official unemployment rate likely underestimates the actual level of unemployment in the economy?

Answer 1

Unemployment rate is calculated as a percentage by dividing number of unemployed individuals by total individuals currently in the labor force. Usually there is high unemployment during recession. Here unemployed workers refer to those who are currently not employed but are willing and able to work for pay and are actively searching for work.

Unemployment rate is usually called as a lagging indicator of the economy, as actually the economy shows improvement before the unemployment rate rises again. This creates a ripple effect in the economy. If there is less employment, then people have less disposable income, thus less money for investment and lesser taxes collected by the government. The actual state of the economy, in terms of its ability to generate jobs for its citizens thus depends on various factors like economic growth of a country, per capita income, wages, trade unions, inflation rate etc.
Labour force participation rate (LFPR) refers to the active eportion of a labour’s economy. Thus it includes people who are either employed or are actively looking for work. Participation rate is an important metric because unemployment figures reflect the number of people who are searching for jobs but are unable to secure employment.