Why are millions of unemployed people excluded from our monthly ‘unemployment’ data?

 In Home News Section, Uncategorized

Do you scratch your head when you hear the government talking about the unemployment rate?

Currently, the unemployment rate is just 4.6 per cent.

How in the world can that be?

Despite all of the economic destruction that’s occurred on the east coast in recent months, the unemployment rate is still that low.

Well, it has to do with the model the Bureau of Statistics uses to calculate things like employment and unemployment.

And I want to show you one crucial element of the model that’s feeding the confusion and which is rarely talked about.

Why define ‘unemployed’ that way?

Every month, the ABS takes a national survey of 26,000 households (roughly 52,000 people) that asks a bunch of employment-related questions.

It uses the information it collects in the survey to make estimates about the rest of Australia’s workforce.

Now, the households that participate in the monthly survey have to fill in a questionnaire and the questions are specific to a two-week period.

For example, the survey that provided the numbers for September’s unemployment rate covered the days from 29 August to 11 September.

That means when households were asked questions about the work they did, they were asked to specifically talk about the work they did from 29 August to 11 September.

That period covered by the survey is called the “reference week”.

The concept of the reference week is very important for what I’m about to tell you.

It’s the reason why some Australians are counted as officially “unemployed” while millions of others (who are also without work) just disappear from the data.

Economists are talking over your head

Let me explain.

For ABS officials to count you as officially “unemployed,” you must meet three strict criteria:

  • You must be without work in the reference week
  • You must have been actively looking for work in the previous four weeks
  • You must be available to start work in the reference week

I want to focus on that third element.

Let’s look at it again: to be considered officially unemployed, you must be available to start work in the same two weeks as the labour force survey is taking place.

What’s the implication of that?

It means if you’re without work, but for some reason you’re not able to start a new job immediately, it means you’re no longer considered officially unemployed.

Even if you’re available to start work in a month’s time, it doesn’t matter. You don’t meet the definition of unemployed for the labour force survey.

And that means you’re shunted off into a different definitional category, called “not in the labour force,” where you have no impact whatsoever on the unemployment rate.

And here’s why they do it.

It’s a game for technicians

Have a look at the graph below.

It’s a simplified model of the labour force framework.

It’s what ABS statisticians, Treasury officials, Reserve Bank officials and economists use to find the unemployment rate.

As you can see, the “labour force” is just a composite of two groups: the employed and the officially unemployed.

How do you know how many people are in the labour force? Easy.

Let’s say you have 12.9 million employed people and 626,000 officially unemployed people. Just add them together.

It gives you a labour force of 13.5 million people (these numbers correspond to the real figures in the economy last month).

And how do you work out the unemployment rate?

Well, just take the 626,000 unemployed people, divide it by the 13.5 million in the labour force, and it gives you an unemployment rate of 4.6 per cent.

That’s telling you 4.6 per cent of the labour force is unemployed.

Note that qualification. The unemployment rate is not telling you how many people are without work in the entire economy. It’s only telling you what proportion of the “labour force” is without work.

And this next bit is extremely important.

Have a look at that big yellow box called “Not in the Labour Force.”

That’s where millions of people are sitting who aren’t employed, yet they’re not counted in the official unemployment statistics.

Not in the labour force?

In September, there were over 7.3 million people in that “Not in the Labour Force” (NILF) group.

You can be in that group for lots of reasons. Traditionally, you might be:

  • Retired
  • Full-time parent
  • Full-time carer
  • Student
  • Permanently disabled
  • Travelling
  • Discouraged job-seeker
  • In prison or another institution

However, in the last three months, the COVID lockdowns and restrictions saw an extra 334,000 people enter the group.

Now, when ABS officials took the labour force survey last month they categorised the above people according to certain criteria.

Here’s what they found.

You’ll notice there are two very big groups.

One big group belongs to retirees, of which there are a couple of million.

The other big group belongs to 3.6 million people who aren’t employed and who didn’t look for work.

Just because those people didn’t look for work doesn’t mean they don’t want to work.

Over 110,000 of them were discouraged job seekers. Nearly 140,000 were parents (predominantly women) who couldn’t find suitable childcare and so couldn’t look for paid work.

But I’m going to put that issue aside for a separate article because it’s worth spending far more time on.

For our purposes today, all you need to know is that those people exist.

Why do they do it like this?

Which brings us to the final section.

There’s a specific reason why the labour force model is set up this way, but authorities are terrible at communicating it.

They do it like this because the labour force framework is designed for economists and statisticians, not for laypeople.

Essentially, it’s there to provide “experts” (and employers) with a regular snapshot of the labour force.

And it’s focused on solving immediate problems for employers.

How so?

Well, in August there were 334,000 job vacancies (a near-record high).

Let’s assume employers needed to fill those positions this week.

Do we know how many unemployed people there are who are immediately available to start work?

We have an idea.

According to the ABS, there are an estimated 626,000 people who don’t have a job but who are actively looking and are ready to start immediately.

Those 626,000 officially unemployed people are part of the immediate labour supply; the group of unemployed people from which employers can draw immediately to fill a vacancy.

That’s it.

That’s what “unemployed” means in the labour force framework.

That’s why they’re the only unemployed people who are counted in the official “unemployment rate.”

We know there are millions of other Australians without work currently, but they’re no good to employers to solve immediate problems because they’re not available to start work now.

Those millions of Australians are part of the potential labour supply, not the immediate labour supply.

It could be weeks before they become available for work and officially join the labour force.

So, next time you hear a politician talking about the national unemployment rate, remember: they’re not talking about every unemployed person in the country.

They’re ignoring millions of people without work.

They’re only talking about a specific subset of unemployed people who can start work immediately, and who are useful to employers immediately.

By business reporter Gareth Hutchens (Original ABC Article)