Is unemployment measured properly?

The protracted and deep recession of the Greek economy, mainly fuelled by excessive austerity, has pushed the country’s official jobless rate to a new record high of 27.2 percent in January, with some analysts predicting it will rise even further in the next few months or quarters.

Most commentators, politicians and others usually point to the doubled unemployment rate among younger people, raising the specter of a lost generation, but there are reasons to believe youth unemployment may be overstated by a wide margin because of the way that it is calculated.

There is no question that a good deal of the Greek population is paying a huge price to correct long-standing imbalances in public finances and the external account. The Gross Domestic Product (GDP) of the country has shrunk by much more than projected at the outset of the first economic adjustment program agreed back in May 2010, inflicting a lot of pain to a growing segment of the population. The soaring unemployment rate is a testament to this reality.

According to the Hellenic Statistical Authority (ELSTAT), the number of unemployed people reached an unprecedented 1.35 million in the first month of 2013, taking the jobless rate to 27.2 percent from 25.7 percent in December 2012 and 21.5 percent in January 2012.

The pessimists, such as the General Confederation of Greek Labor (GSEE), predict it will comfortably exceed 30 percent by year-end, bringing the average jobless rate to 29 percent this year.

Of course, this remains to be seen, although the continued slide in economic activity, reinforced by the events in Cyprus and the continued credit crunch, points to the further swelling of the ranks of the unemployed across most age groups. This does not mean a seasonal drop in the Greek unemployment rate will not materialize during the tourism season, which is expected to do particularly well this year.

In our view, it is perhaps more important to look at the long-term unemployment rate, which takes into account those out of work for more than 12 months.

It is estimated that more than half of those unemployed, perhaps 60 percent, belong to this category. The poor state of the local labor market is also made clear by the hundreds of thousands of employees – more than 400,000 – who have worked without pay for more than four months, according to officials.

Of course, all of the above as well as the vast majority of the unemployed are found in the private sector, since jobs in the public sector are protected by the constitution and the country’s political elite. Politicians’ foot-dragging over laying off a few thousand civil servants found to have engaged in illegal dealings is indicative of the situation.

Coming back to the unemployment front, there is no question that the extremely high unemployment rate in the 15-24 age group should be alarming to policymakers and others since it shows that the younger generation is being hit harder. These young people earn no income and do not have the opportunity to acquire new skills.

However, one should ask: Is this really the case or do we have a gross overstatement of the youth unemployment rate because of the calculation method? We are not sure. In calculating the unemployment rate, officials divide the number of unemployed by the labor force. The latter includes people of working age who are employed full-time or part-time, and those who are actively seeking work.

In the Greek case, the jobless rate in the 15-24 age group reached 59.3 percent in January, meaning six out of 10 young people were unemployed.

Nevertheless, students and other young people in vocational training are not actively seeking work and therefore are not part of the labor force. If they had been included, the labor force would have been bigger and the unemployment rate for this age group would have fallen significantly.

The bigger the number of students or/and trainees is, the bigger the drop in the youth unemployment rate would be if the jobless rate were calculated on this basis, since the number of the unemployed would not change. Of course, one may argue that this is erroneous since a number of students would prefer to be working but don’t because they can’t find a job.

Some analysts suggest that the population instead of the labor force should be used to calculate the unemployment rate. If that were the case, Greece’s unemployment rate in the 15-24 group could have fallen below 20 percent compared to around 60 percent with the classic method.

There is no doubt that impressions play a more important role in determining economic outcomes than many people assume. Including the students and vocational trainees in the labor force would have driven Greece’s youth unemployment rate much, much lower than the 59-60 percent reported by authorities, painting a better picture of the labor market.

Whether that is correct or not can be debated. However, reporting the youth unemployment rate using both calculation methods can help shape impressions in a fair way, highlighting the issue of students being out of the labor force.

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