The Unemployment Rate: Time to Give it a Rest?

Abstract

The most overworked figure in our society may be the unemployment rate. Newscasters, politicians, and economists use it in discussing everything from the overall health of the economy to the merits of alternative welfare programs. Despite its widespread use, however, the unemployment rate frequently is criticized for not indicating the true state of the economy’s health or of society’s welfare.

If the unemployment rate falls to 4 percent, for example, some economists will argue that it’s too low and that, even though the rate is greater than zero, the economy is overemployed. Others will argue that unemployment has not fallen far enough and that, although the overall rate is fairly low, the rates for blacks and teenagers are much higher. Each group has a point; but one and the same statistic is being used for two quite different purposes.

The first group uses the unemployment rate as an economic measure. These people are interested primarily in the overall state of the economy. Are we in a recession or a boom? Where are we headed? How fast? People with the second viewpoint use the unemployment rate as a welfare measure. They are interested primarily in how the benefits of the economy are distributed. Who is suffering? How bad off are they? The different concerns of these two groups can and often do lead to different policy prescriptions based upon the same reported overall unemployment rate, even though both groups may complain that the unemployment rate is an imperfect measure of what they’re concerned with.

If the unemployment rate is so overworked and imperfect, perhaps it should be figured a different way, or replaced, or at least supplemented by other statistics. Just what changes should be made depends on whether the objective is to construct an economic measure or a welfare measure.

Keywords: Unemployment rate, economy