Why the employment rate is more informative than the unemployment rate
The latter is a ratio whose denominator moves. The former relates employment to the population, which makes it less sensitive to movements into inactivity.
Two different ratios
The unemployment rate relates the unemployed to the labour force, that is to people in work or unemployed. The employment rate relates people in work to the whole population of the corresponding age.
The denominator of the first varies with entries into and exits from the labour force, which produces movements in the rate that reflect no change in employment.
Being counted as unemployed also requires meeting three conditions set by the International Labour Office: being without work, available at short notice and actively seeking work. A person who fails to meet one of them is classified as inactive, even if they want to work.
The classic case
When people stop looking for work, they leave the labour force. The number of unemployed falls, the denominator falls too, and the unemployment rate falls without any job having been created. The phenomenon is known as the discouraged worker effect.
The employment rate does not move in that situation, since neither numerator nor denominator has changed. That is the main argument for using both together. The reverse movement also exists: a recovery can temporarily push up the unemployment rate by bringing back into job search people who had given it up.
The limits of the employment rate
It does not distinguish full-time from part-time, nor stable jobs from short ones. A country may show a high employment rate with a substantial share of involuntary part-time work. Indeed, having worked at least one hour during the reference week is enough to be counted as employed.
Statistical agencies therefore also publish a full-time equivalent employment rate and underemployment indicators, which complete the picture.
The role of age bounds
Published rates most often cover fifteen to sixty-four year olds or twenty-five to fifty-four year olds. The choice of bound strongly alters the level shown, depending on the length of studies and the retirement age. The European strategy adopted in 2010 thus set its target for twenty to sixty-four year olds.
Cross-country comparisons are therefore particularly sensitive to that choice, which explains part of the gaps observed between publications covering the same countries. A country where studies are long and rarely combined with a job will show a lower rate at young ages, without this reflecting any difficulty in entering work.
What should be read together
A solid diagnosis combines the employment rate, the unemployment rate, the halo around unemployment and the underemployment rate, which describe four distinct situations.
None of those indicators is self-sufficient, and commentary retaining only one regularly produces conclusions the other three contradict.
Key points
The denominator of the unemployment rate varies with entries into and exits from the labour force.
Discouragement lowers the unemployment rate without creating jobs; the employment rate does not move.
The choice of age bounds strongly alters the level shown for the employment rate.
This article describes documented mechanisms and disagreements. It recommends no position, no party and no vote, and commits to no reading other than that of the work it cites.
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