Unemployed or lazy? Economists know better

The Conversation

Every scientific discipline has its own language, largely to save time when conversing with others from the same discipline. For instance, in trigonometry it’s much easier to talk about the “hypotenuse” rather than “the side opposite the right angle in a right angle triangle” every time.

In economics we use terms such as “opportunity cost” of an activity rather than “the highest-valued alternative that must be given up to engage in that activity”. A problem often arises when an “economics” term is the same as one used in general conversation but has a different meaning. For instance “investment” in economics means purchases of machinery, factories and houses whereas people often say they are investing in a savings account or in rare coins.

Differences in meaning between words in general use and in economics can often provoke bewilderment or hostility. Even terms as simple as employment and unemployment, as used by the Australian Bureau of Statistics and in economics, are little understood by the general public.

What ‘unemployed’ really means

An understanding of these terms greatly enlightens public discussion. In my experience people are astounded when they learn that you only have to work for one hour in paid employment per week to be classified as employed! To be classified as unemployed you have to be ready to start work and have actively looked for work in the past four weeks.

That’s why the unemployment rate can go up when the labour market improves. This is because people who reasonably give up looking for work because they see little chance of getting a job, begin to look for work when they think their chance of getting one has improved. They leave the “not in the labour force” category and enter “unemployment” category. It is also surprising to most people that the number unemployed is different to the number on unemployment benefits.

It’s worth knowing unemployment statistics are only estimates, not the actual numbers in the population. They are based on the Labour Force Survey which is a sample of 0.33% of the population about the employment status of everyone in the household aged 15 years and older. Because they are based on a sample of the population, the statistics have errors. In its monthly report the ABS publishes these "sampling errors".

Every media report I saw regarding the July estimates of the unemployment rate said it had risen to 6.4% - a rise of 0.3 percentage points (with consequent alarm about rising unemployment). However, the ABS report clearly says that the estimate of the monthly change in the unemployment rate has a “95% confidence interval” of -0.1 to 0.7. We can be 95% certain that unemployment was somewhere between 6% (down from June) and 7.1% (a very worrying increase). Why don’t media report numbers like this? And what would be the reaction to a prime minister who said the unemployment rate might have gone up or down – weasel words?

Economists have many terms for the unemployed

In labour economics we have specific terms for our analyses. In my co-authored introductory economics book I counted 23 labour specific terms; and this is on top of the over one hundred other terms in introductory economics before students get to study labour markets.

The area of unemployment is where economists’ terms often deviate from popular use. For instance, perhaps quite rightly, most people don’t like terms like “natural rate of unemployment”, even more so when told it means (to paraphrase) “the unemployment rate when you have full employment”.

The Commonwealth Treasury estimates this rate of unemployment to be just under 4.75% (over 500,000 persons) which most would find unacceptably high. In addition, about 1.5 million people of working age rely almost entirely on social security for a living, but only a third are “unemployed”. We need economics to provide basic information as well as analysis for understanding and for sensible policy.

But labour economists have many terms to describe the unemployed (or near unemployed), including - discouraged workers, structurally unemployed, frictionally unemployed, voluntary/involuntary unemployed, underemployed and marginally attached.

Why economists can’t win

Most of the general public fall somewhere between two camps when it comes to their views of the unemployed. One view is that most unemployed really want to work and there are not enough jobs, while the other is the view that the unemployed don’t want to work, are lazy or there is something wrong with them (again I am paraphrasing).

The categorisations economists employ to explain unemployment offend both camps because they are used to demonstrate that the reasons for unemployment and solutions to the problem are not that simple. Also, we are often characterised as being “unfeeling” in what is rightly regarded as an emotional issue of disadvantaged people, in a seemingly cold, logical way.

In fact, one of the reasons economists are unpopular (oddly enough, particularly with other academics) is because we do provide a logical framework for discussion and solutions of problems relatively free of normative preconceptions – we may be wrong sometimes but at least we do have a logical framework. By the way normative is also a term we economists use a lot.

This article was originally published on The Conversation. Read the original article.