Developing additional measures of unemployment

In September-December 2016, the group of those marginally attached to the labour force was nearly as big as those actively looking for jobs
Inadequacy of the traditional measure of the unemployment rate is now well-recognised internationally. I pointed out that a problem in the falling unemployment rate of recent times is that it is, in fact, a reflection of falling labour participation rate. Today, I introduce some additional unemployment metrics to overcome at least a part of the limitation of the traditional unemployment rate.

The unemployment rate is the ratio of unemployed people to the total labour force. During September-December 2016, the labour force was 46 per cent of the population and the unemployed about 6.8 per cent of the labour force. So the unemployment rate stood at 6.8 per cent.

Unemployed means those not employed but willing to work and also actively looking for a job at the time of the survey. “Actively looking for a job” is an important condition in the definition of the unemployed. This condition keeps out those who, for some reason, are not actively looking for a job even though they are willing to work. Even though they are willing to work if a job is available, they could not be looking for a job because of perfectly rational reasons such as the knowledge that jobs are not available in their region anyway.

Those who are unemployed and are willing to work but are not actively looking for a job are, in the jargon of economists, considered as out of the labour force and therefore not considered in the computation of the unemployment rate. The Bureau of Labor Statistics of the US calls this group as “marginally attached” to the labour force.

The BSE-CMIE initiative to measure unemployment in India also atte-mpts to estimate the size of this group of the marginally attached to the labour force. In September-December 2016 this group was nearly as big as those that were actively looking for jobs. In a labour force of 436 million, nearly 30 million were unemployed in the traditional sense. An additional 25 million were marginally attached to the labour force.

This population has a high propensity to join (or rejoin) the labour force. It is therefore useful to have a measure of the labour force and the unemployed that includes these marginally attached as well.

To do so, we define the Greater Labour Force that includes the employed, the unemployed who are willing to work and actively look for a job and also those who are willing to work but not actively looking for a job. The Greater Labour Force was 48.5 per cent of the total population of 15 years or more. The Greater Unemployed are those that are the last two of the above — the unemployed who are willing to work and actively look for a job and also those who are not actively looking for a job.

The Greater Unemployment Rate (ratio of the Greater Unemployed to the Greater Labour Force) works out to 11.8 per cent for September-December 2016 — nearly twice the rate as per the regular internationally accepted method of measuring unemployment.

Andreas Hornstein, Marianna Kudlyak, Fabian Lange and Tim Sablik describe a similar situation in the US. Here, unemployment rate fell nearly four percentage points since its recession peak in 2009, but labour participation also fell two percentage points during this period. Thirty per cent of this decline in the labour force was because “qualified and willing job seekers stopped looking for a job”.

By classifying such workers as “out of the labour force”, the standard unemployment measure overstates the degree to which resources in the labour market are utilised, and so it understates the degree of the stress of unemployment.

The authors have proposed a new measure — the non-employment index, based on probabilities of the various parts of the population that are out of the labour force to rejoin the labour force. This index explains better, the utilisation of the labour force.

The BSE-CMIE initiative needs to build a longer time series and understand the probabilities of migration of labour across employment and various kinds of unemployment. While the Greater Unemployment Rate is a beginning in this direction, there is more work to do to create the non-employment index for India.


Sentiment gauge


Unemployment gauge

Business Standard brings you CMIE’s Consumer Sentiments Index and Unemployment Rate, the only weekly estimates of such data. The sample size is bigger than that surveyed by the National Sample Survey Organisation. To read earlier reports on the weekly numbers, click on the dates:

November 21November 28December 4,

Consumer sentiment indices and unemployment rate are generated from CMIE's Consumer Pyramids survey machinery. The weekly estimates are based on a sample size of about 6,500 households and about 17,000 individuals who are more than 14 years of age. The sample changes every week but repeats after 16 weeks with a scheduled replenishment and enhancement every year. The overall sample size run over a wave of 16 weeks is 158,624 households. The sample design is of multi-stratrification to select primary sampling units and simple random selection of the ultimate sampling units, which are the households.

The Consumer Sentiment index is based on responses to five questions on the lines of the Surveys of Consumers conducted by University of Michigan in the US. The five questions seek a household's views on its well-being compared to a year earlier, its expectation of its well-being a year later, its view regarding the economic conditions in the coming one year, its view regarding the general trend of the economy over the next five years, and finally its view whether this is a good time to buy consumer durables.

The unemployment rate is computed on a current daily basis. A person is considered unemployed if she states that she is unemployed, is willing to work and is actively looking for a job. Labour force is the sum of all unemployed and employed persons above the age of 14 years. The unemployment rate is the ratio of the unemployed to the total labour force.

All estimations are made using Thomas Lumley's R package, survey. For full details on methodology, please visit CMIE India Unemployment data and CMIE India Consumer Sentiment.

The creation of these indices and their public dissemination is supported by BSE. University of Michigan is a partner in the creation of the consumer sentiment indices.

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