Limitations of the Unemployment Rate Measurement

The unemployment rate is not a perfect indicator of employment in the economy. The following are some reasons:

• Discouraged workers - those who want a job but have given up looking and therefore do not fall within the definition of the labor force. These persons tend to make the reported unemployment rate lower than it otherwise would be.
• Collecting benefits but not job seeking - while a state unemployment office may require a person to actively seek a job in order to collect unemployment insurance benefits, some benefit recipients do not really want a job and do not put much effort into the job search. Due to this effect, the reported unemployment rate is higher than it otherwise might be.
• Underemployed - a person is counted as employed if he or she is working part-time; however, that person nonetheless may be seeking full-time work.

Discouraged workers and ones collecting unemployment benefits without seeking a job make it difficult to distinguish between those who are unemployed and those who are not in the labor force. These effects work in mixed directions; unemployment may be overstated or understated by the unemployment rate. As long as any bias in the unemployment rate is relatively constant over time, then the rate is still useful for measuring changes in the economy from one period to the next.

Other indicators such as the number of discouraged workers and part-time labor statistics all can supplement the unemployment rate data to provide additional insight.