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Economics focus
The reserve army
Feb 12th 2004
From The Economist print edition
The unemployment rate is only the beginning of the problem
RARELY does an economic indicator provide as much fodder for politicians and
pundits as the unemployment rate. Far more than, say, current accounts or capacity
utilisation, unemployment is something everyone can understand: you are either in
work, not in work, or looking for work. As such, it is easily seized upon as an
indicator of the broader health of an economy, or even of workers' eagerness to
The issue of unemployment has loomed especially large in America in recent months.
That is partly because there are presidential elections in November, and much will
hinge on whether George Bush can convince voters that an apparently booming
economy is producing jobs. A glance at the unemployment rate would seem to give
him the answer he wants. The unemployment rate has fallen from a post-recession
peak of 6.3% in June to 5.6% last month, though that is still higher than the 5.0%
that many economists consider to be the “natural rate” of unemployment—one that
results merely from the normal or “frictional” patterns of job gains and losses at any
one time.
But the unemployment rate is, in fact, a poor measure of economic health. It is
defined as the fraction of the people in the labour force—those who are actively
seeking work and available for it—who cannot find a job. And it relies on surveys to
determine who is, in fact, actively seeking work rather than enjoying a spot of
leisure. It is that subjectivity that makes the unemployment rate such a flawed
statistic. A better question by far is how many people are employed—ie, are being
paid by someone for doing something, since this should be less subject to doubt.
Or so you might have thought. Yet there has been a fierce debate in America
recently over even this humble statistic. That is because the number employed in
America is also still measured using surveys, and the two that are widely used tell
different stories. One is taken of over 400,000 firms with formal payrolls. Another
asks 60,000 households whether people in them are working. But both are hostage
to the usual limitations of using small samples to estimate employment for the whole
economy, though obviously to different degrees. They are, moreover, subject to big
revisions. And both have their advantages.
The payroll survey uses a bigger, more easily verifiable sample. On the other hand,
the household survey may better capture a rise in jobs among new small businesses
and the self-employed, both of which seem to have accounted for a lot of new
employment in the recent recovery. According to the household measure, nearly
139m Americans were in work in January, even more than had jobs at the height of
the boom in March 2000. By the payroll measure, some 130m were in work—a fall of
nearly 2% since employment peaked.
Left-leaning pundits naturally prefer the payroll survey. The Bush administration and
its friends prefer the household version. Still, even the latter's figures would make
job growth in the current economic recovery anaemic by historical standards.
Concerns over employment data are not just an American problem. According to a
recent report from Barclays Capital, Germany's employment statistics may be
overstating the numbers of self-employed because of a government initiative to
subsidise previously unemployed workers in starting their own business. Combined
with other shenanigans, this may produce an army of “hidden unemployed” of 1.4m,
estimates the report, some 30% more than the number of officially unemployed. In
Japan, the unemployment rate has never risen above 5.5% in recent years, despite a
decade-long economic funk. That is in part because firms are reluctant to sack
workers for social reasons.
Flawed though they may be, the employment numbers are of fundamental
importance. Two crucial questions for economic output and for the suffering caused
by unemployment are: what portion of the working-age population does not work
and how many of those that do not work want to do so?
The international brigade
Regardless of which survey you believe, more people of working age are at work in
America than in Europe. America's employment rate is just over 70%—almost ten
percentage points higher than Europe's. In other words, less than a third of workingage Americans are not in work, whereas in Europe the figure is closer to 40%,
though the gap between the two economies has been closing in recent years, as
America's employment rate has fallen and Europe's has risen.
Many of those that do not work would almost certainly like to. By the OECD's
reckoning, the ranks of those who could be mobilised are thus far bigger than those
that are formally classed as unemployed. Indeed, in most countries, according to the
OECD, there are far more gains to be had in bringing inactive workers into work than
in reducing unemployment to its “natural” rate. In Italy, for example, the OECD
reckons that more than a fifth of the working-age population could be brought into
work, and some 17% in Spain and Greece.
In the euro area, the relatively lower employment rate explains much of the region's
lower GDP per person. And low employment is often the fault of misguided policies
that discourage people from working, such as high payroll taxes; marginal income
taxes that penalise the work of a lower-paid spouse; rules that make sacking
workers expensive; and generous benefits that encourage the work-shy to be
classed as disabled, to name but a few.
Such structural problems play a huge role in the differences in the wealth of nations.
The trouble is that fixing them can be politically fraught. Just ask Gerhard Schröder,
Germany's chancellor, who resigned this month as head of his party, because of
resistance to a package of modest reforms. Having jobs is one thing; working quite
The Truth About the Job Numbers
The “self-employed” are not this bad economy’s saviors.
By Robert B. Reich
Web Exclusive: 09.09.04
Print Friendly | Email Article
Last Friday's household survey showed the unemployment rate dipping to 5.4 percent in August, which isn't
bad by historic standards. But last Friday's payroll survey showed that employers created only 144,000
payroll jobs in August, which is pretty awful given that the economy needs at least 150,000 just to keep up
with new workers coming into the labor market. So the obvious question: Do we have anything to celebrate
this post Labor-Day week?
Well, let's take a closer look. The more upbeat household survey is compiled every month by a team of
surveyors from the Bureau of Labor Statistics who visit a random sample of 60,000 homes around country,
and ask: "are you working?" If the answer they get is "no," the next question is "are you looking for work?"
Only if the answer to that second question is "yes" -- I'm looking for work -- is the person counted as
"unemployed." This means that everyone who'd like to work but has given up looking because they've tried
and can't find any work, is not included as being among the unemployed. There's the additional problem that
some people who aren't working but are embarrassed to admit it will say they are.
The payroll survey, by contrast, asks a much larger and different sample -- 400,000 employers, who employ
about a third of the entire workforce -- how many employees they've added over past month. No guesswork
there. Just look at the payrolls. There's only one rub: The payroll survey doesn't include everyone who's
become self-employed.
Now, this would be a problem if self-employment were a real alternative. But that's not what the evidence
shows. A new research paper from the San Francisco Federal Reserve finds that the number of "selfemployed" rises during weak economies and falls when people can find payroll jobs. In other words, being
"self-employed" doesn't necessarily mean you're making enough money to live on. All it might mean is you
can't find a payroll job and you're calling yourself "self-employed." No big surprise there.
Bottom line: Employers are still reluctant to hire. And it's not hard to figure out why. Demand for their goods
and services remains soft -- because consumers, who are also workers, don't have enough money in their
pockets or confidence in their jobs and paychecks to flood back into the malls.
The following Questions all make reference to the first article:
The reserve army
Feb 12th 2004
From The Economist print edition
1. What is the importance of an unemployment rate that does or does not determine who
is “enjoying a spot of leisure” in paragraph three? Are there any other reasons the
unemployment rate tends to over- or under-state actual unemployment? Consider:
discouraged workers, the role of underemployed workers, and other skew factors in the
Note - Your answer should separately analyze how the inclusion or exclusion of
at least three groups in the official unemployment rate results in an official rate that overor under-states actual unemployment. State clearly for each of the three groups you
choose to analyze whether the fact our official rate includes or excludes them results in
EITHER an overstated or understated rate. For some groups you will explain why the fact
our official rate excludes (or includes) them results in understatement. For others you will
explain why their inclusion or exclusion in the official data results in overstatement.
However, for any one skew factor, you will not say it results in understatement and/or
overstatement (specify one or the other for each skew factor).
Skew factor you must analyze: Those “enjoying a spot of leisure”
Skew factors you could analyze (any two):
Those in the informal economy
Underemployed e.g. part-time workers
Those who have given up looking for a job
Use example #’s e.g. your starting point is that the rate as currently reported is
# looking
*100= Unemp Rate ------
Labor Force (LF)
7million *100= 5%
150 million
2. What is meant by “The Reserve Army” (the article’s title)? Explain the argument in
paragraph ten that more gains for many economies could come from (Policy 1) bringing
working-age people who are not looking for a job back into the workforce than (Policy 2)
lowering unemployment to the natural rate of unemployment. Gains should be explained
in terms of number of new workers or dollar value of additional output (use example #’s).
3. How could the natural rate of unemployment itself be reduced? Specifically how
could (a) structural unemployment and (b) frictional unemployment be reduced? You
may want to review: “Chapter 6 Focus - Defining the Natural Rate of Unemployment and Analyzing its
Determinants” to answer this question.
Note: the answer is not to simply declare a new estimate of the natural rate; suggest
policies for (a) and (b) that would alter the real economic situation in a way that would
compel economists to change their estimate of the natural rate to reflect the new reality.
4. Paragraph five states: “According to the household measure, nearly 139m
Americans were in work in January, even more than had jobs at the height of the
boom in March 2000. By the payroll measure, some 130m were in work—a fall of
nearly 2% since employment peaked.” In what ways does the fact that the
difference between the two numbers (9m) is due to people reporting selfemployment in the household survey improve that survey’s accuracy in measuring
jobs and output, and in what ways does the inclusion of such workers worsen its
Additional Sources
Info on Students (re: Question 1):
It deals with the whole population age 16-24, including students
Interestingly, in this age group, 16.4 million do not attend school.
21 million do, with roughly half in high school and half in college.
9.7 million are in high school and 11.3 million are in college, who have labor force
participation rates of 29.4% and 54% respectively.
Overview of Employment Data:
Partially illustrative of students, ages 16-19
Both sexes, 16 to 19 years
Civilian labor force.......................
Participation rate.....................
Employment-population ratio............
Unemployment rate......................
mainly to click the first link on this page: