Hidden Unemployment & Disguised Unemployment
By Steve Bain
The extent of 'hidden unemployment' in any given place and at any given time does vary to a large extent, but it is an ever present phenomenon that deserves attention. The official measures tend to under-report the real unemployment rate quite badly, and the difference is explained by the hidden and disguised components.
Thankfully, there is a significant body of research into this that can be drawn upon to inform us, and help to understand the real numbers involved. This is useful because, as time has passed, there has been a clear tendency for our governments to redefine how the official measures are calculated.
By curious coincidence those redefinitions have generally led to lower reported unemployment rates, making government economic policy appear more successful, whilst sweeping under the carpet a larger and larger mass of hidden unemployment. Call me cynical if you like, but it looks a lot like the same tactic that has been used with the reported inflation figures over the past few decades, and I'm generally suspicious of such things. As Barrett puts it:
"The official unemployment rate is an incomplete and increasingly irrelevant measure of the health of labour markets".
Barrett, S. (2002) - Integrating Hidden Unemployment into Measures of Labour Market Health
In this report I'll be looking under the carpet, to get a better idea of the real unemployment rate.
What is Hidden Unemployment in Economics
The problem with the official unemployment rate statistics is that, to be counted, an individual must be without work and actively seeking it and available to start within a few weeks. Whilst on the face of it this might seem like a reasonable set of criteria, in practice it misses a lot of people who would seek work if the economic circumstances were better.
In deprived areas in particular, i.e. areas that have faced rapid economic decline for one reason or another, the local job market usually fails to provide the prospects for satisfactory work. For example, deindustrialized areas may have a lot of workers with antiquated skills meaning that there is a mismatch between the skills that those people have, and the skills that existing employers need.
This is a big problem in deprived area labor market economics; while the workers with redundant skills might want a job, the only work open to them would be for entry-level low-skill jobs that pay a much lower salary than those that they had previously held. In addition, the welfare trap that I described on my page about the effects of unemployment & worklessness perpetuates the problem by removing any financial incentive to take up those low paid jobs.
The outcome of all this is that unemployed people start to drop off the official measures of unemployment because they are not actively seeking, or available to start, working in existing entry-level jobs. At this point these people become part of the hidden unemployment statistics.
The most significant diversion from the unemployed stats comes in the form of increased long-term sickness stats (as explained in the report by Beatty & Fothergill - see link below). In addition, some unemployed people may become 'discouraged' and take early retirement even though they would prefer to carry on working in a suitable job.
In other cases, discouraged workers who want work but who have given up looking will also drop off the official unemployment statistics e.g. many lone-parents fall into this category due to the difficulty of finding affordable childcare that would free them to work. Similarly, spouses who would like to work to bring in a second income may also give up looking when suitable prospects are unavailable.