Monday, September 8, 2008

Limitations of Unemployment Data

Limitations of Unemployment Data

Unemployment data, like all data, have limitations. The statistics reported by the Bureau of Labor Statistics are not perfect measures of labor market conditions in the United States. Two criticisms of the methodology used to measure unemployment suggest the reported data underestimate the true level of unemployment. Another criticism suggests the data may overestimate unemployment, however.

Some people counted as employed are underemployed. Underemployment refers to people with jobs who are not working as much as they want or need to work. Consider a single parent trying to support three children. The only job she is able to find is a part-time job, such as working 25 hours per week at McDonald's. Will this part-time job provide enough income to support her family? People with part-time jobs may be counted as employed even though they may not be working as much as they want or need to work. Because unemployment statistics may not represent the fact that some people are not working as much as they want or need to work, some critics argue the labor market data reported by the government may underestimate the actual amount of unemployment in the economy.

Discouraged workers are individuals who would like to work but have given up looking for a job. Some people may become discouraged by their inability to find a job and stop looking for work. Because they are no longer looking for a job, discouraged workers are included with those who are not in the labor force. If they had not become so discouraged and continued to look for a job, they would be classified as unemployed. Consequently, one could argue that workers becoming discouraged may reduce the reported unemployment rate and underestimate the true amount of unemployment in the economy.
Another criticism of the labor market data suggests the reported numbers may overestimate unemployment, however. Some respondents may give false or misleading answers to the telephone survey. Suppose a person does not have a job and collects unemployment compensation from the government. If someone from the government calls to ask "Do you have a job?" and "If you do not have a job, are you looking for one?" some people might say they are looking for work, which is a requirement for receiving benefits, even if they are not. If adults without jobs are not looking for work, technically they should not be classified as unemployed. Instead, they should be classified as not in the labor force. Consequently, some critics argue that the tendency for some people to misrepresent themselves in phone surveys causes the unemployment data reported by the government to overestimate the actual amount of unemployment in the economy.

When all three criticisms of labor market data are considered, the effects tend to offset each other. Even though unemployment data have these limitations, most economists believe they are reasonable measures of the true level of unemployment in the economy.

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