Steve Bain

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.

Estimates of Invisible Unemployment & Reduced Labor Force Participation

(The term 'invisible unemployment' is an alternative for 'hidden unemployment' and the two terms may be used interchangeably).

In a 2002 study of the East Midlands of England by Beatty and Fothergill, the official claimant count unemployment rate was shown to vary modestly from one district to another, ranging from around 1 to 6 percent, but the real unemployment rate was estimated to vary from around 3 to 15 percent due to much larger disparities in the amount of hidden unemployment from one district to another.

In districts with a low claimant count, hidden unemployment adds relatively little (2 to 3 percent) to the real unemployment rate, but where claimants are high, it adds much more (8-10 percent).

An OECD Hidden Unemployment study estimates that, from 1980-2001, the 'adjusted unemployment', i.e. inclusive of hidden unemployment, has averaged about 3.6% more than the official rates across a group of developed western economies, ranging from 2.0% to 9.2% more than the official measure.

Clearly, all this extra unemployment implies that the labor force participation rate is significantly reduced in deprived areas, and until there is a meaningful financial incentive to find work in a suitable job (even if it is an entry-level job), it seems likely that this problem will continue.

Disguised Unemployment & Menial Work

There appears to be some general confusion on the web as to the meaning of the term 'disguised unemployment'. It relates to a quite different concept than hidden unemployment, and is actually the original term applied to what is more commonly described as 'underemployment' in modern economic terminology.

Disguised unemployment is a very real problem, and in modern times it has a great deal of significance to the pool of underemployed graduate labor doing menial work. Anyone who is qualified/skilled to do work at a level of productivity higher than that which he/she is actually doing can be described as underemployed, and the total of these people forms the disguised unemployment count.

Whereas the hidden unemployed are actually workless, the people in disguised unemployment are not, but the jobs that they have do not fully utilize their skills/abilities.

Where hidden unemployment is known to hit the deprived communities hardest, it is unknown which communities are hit hardest by disguised unemployment due to the near impossibility of tracking the problem. Nevertheless, it remains a topic of concern.

The Real Unemployment Rate

As a ball-park estimate, the real unemployment rate after including hidden unemployment within the figures (but not disguised unemployment since we don't have any number to estimate it) seems to come in at roughly double the official rate, at least most of the time. Depending on the economic business cycle it may be more or less at any given moment, but on average double seems reasonable.

In my article about the effects of unemployment & worklessness I had simply taken the average employment rate of the top performing local authority areas in Great Britain (in terms of their employment rates) and compared them to the worst performers. I then noted that if the worst performers could raise their employment rates to equal the best performers then it would raise national income by around 8%.

As it turns out, my calculations from that research would also imply that the employment rate is almost exactly 5 percentage points lower than what would be the case if the worst performers were to increase their employment rates to a similar level to that of the top performers. This gives a consistent reverse measure of the real unemployment rate, which the research papers listed in the sources below estimate to be about 3-5 percentage points higher than official measures.


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