Economic 101 - Don't let the unemployment rate fool you!

In a perfect world, high economic growth will have low unemployment rate and low economic growth will have high unemployment rate.  However, we do not live in a perfect world and there is a paradox in every theory.  Therefore, we can have a low economic growth and a rising unemployment rate in an economy like Singapore.  Rising unemployment rate seems like a benign factor in this case.  How true is this?

The paradox arises from the definition of being unemployed.  An unemployed person is considered unemployed if he is actively looking for a job but cannot get a job within 6 months.  Thereafter, he is no longer considered unemployed because he will be categorized as out of the labour force as his interest in finding a job has disappeared after 6 months.

The labour force consists of employed and unemployed persons (Employed + Unemployed).

The calculation of the unemployment rate:
Unemployment rate = No. of unemployed / labour force

Let's exemplify the paradox with some examples.

Example A:
Labour force = 100 persons (Employed + Unemployed)
Employed = 95
Unemployed = 5

Unemployment rate = 5/100 = 5%

Example B;
Let's say 1 person cannot find a job in 6 months after actively looking for a job and he is considered to be out of the labour force.  Therefore, the following will change.
Labour force = 99 (1 is out of the labour force)
Employed = 95 (remain constant)
Unemployed = 4 (1 is out of the unemployed because he is out of the labour force)

Unemployment rate = 4/99 = 4%

As you can see, the number of employed persons is the same (95) in both examples but the unemployment rate has improved from 5% to 4%.  This happens without any improvement in the economic growth and the government can claim credit for lowering the unemployment rate by doing nothing.

Therefore, when you read any unemployment rate figure, please remember to look at the details and not just the headline number which can be very misleading.