The unemployment rate refers to the share of the total labor force that is without a job but actively seeking work. It is one of the broadest and most widely available indicators of economic activity. In every economy there are always some people who lose or quit their jobs, while others find new employment. As a result, there is constantly a certain level of unemployment that comes with economic activity. We call this frictional unemployment. In addition to that, market shifts and changes in the supply and demand of labor can cause significant changes in the unemployment rate. These changes can affect entire countries, selected regions, or specific industries.
Data and Calculation
The unemployment rate is calculated as the number of unemployed people within the workforce divided by the total workforce. Hence, to calculate the unemployment rate, you can use the following formula:
Numbers on national unemployment are provided by the International Labor Organisation (ILO). These numbers are harmonized estimates, based on the Key Indicators of the Market database. Unemployment rates by the ILO are published annually. In addition to that, national agencies report data on unemployment on a quarterly or even monthly basis.
Analysis and Conclusions
When we analyze the unemployment rate, one of the most interesting things to look for is general trends (i.e. changes over time) especially within and across specific industries. Such trends often indicate market shifts or changes in the attractiveness of the industry.
Unemployment rates should never be analyzed in isolation, as this may lead to false conclusions. For instance, a high unemployment rate does not necessarily mean that a country has a poor economy or population. In fact, quite the contrary may be true. We often find that developed countries have a higher unemployment rate than developing countries. This may be due to the fact that the social system in rich world countries is better than in developing countries. As a result, people in developed countries are more likely to accept unemployment, whereas in developing countries, employees will accept lower wages and worse conditions, because there is no social security system to take care of them otherwise.
To give an example, let’s look at the official unemployment rates of Cambodia, Rwanda, or Benin. All three of them are classified among the least developed countries of the world (according to the UN). Their unemployment rates are 0.4%, 0.6% or 1% respectively1. By contrast, the average unemployment rate in developed countries currently stands at about 8%2.
Limitations and Shortcomings
Critics argue that the definition of unemployment (as introduced at the beginning) is not always appropriate. In some cases, people who consider themselves unemployed may not be included in the statistics, because they do not meet the criteria of “actively seeking employment”. More specifically, there may be people who are able and willing to work but not actively seeking employment for a number of different reasons such as restricted mobility, structural barriers, discrimination. These people make up what we call “hidden unemployment”. They are not included in the official unemployment statistics, even though they are without a job and willing and able to work.
Furthermore, especially in developing countries a large number of people are self-employed simply because the economic system does not provide enough jobs. These “necessity entrepreneurs” often work and live in extremely poor conditions. Nevertheless, they are not considered unemployed. In this case, the unemployment rate indicates a strong economy, even though this may be far from reality.
In a Nutshell
The unemployment rate refers to the share of the total labor force (not the total population) that is without a job but actively seeking work. It is one of the broadest and most widely available indicators of economic activity. Nevertheless, unemployment rates should never be analyzed in isolation, because this may lead to false conclusions. Possible hidden unemployment and regional factors should always be taken into account, especially in developing countries.