Unemployment and Inflation

I.     Unemployment

A.    Despite International Labour Office conventions, differences continue. See this article and this one from the U.S. Department of Labor.

1.      Without work?  Contractually (Europe, Japan) or physically (U.S.).

2.      Available?  During survey (N. America, Japan) or within 2 weeks (EU).

3.      Seeking work?  Generally speaking, you must have searched during the past 4 weeks to be considered unemployed (instead of "marginally attached").  "Passive jobseekers" who conduct their research for work strictly by reading newspaper ads have been included in the labor force (and among the unemployed) in Canada, but not in the United States


B.      Standard definition can be adjusted for:

1.      Duration - the basic unemployment rate tells you how many people were unemployed at a point in time, but doesn't tell you how long those people have been unemployed.  This can be measured by the average duration of unemployment or by the percentage of the unemployed who have been jobless for, say, a year or more.  This relates to whether the unemployment is frictional, cyclical, or structural.

2.      Underemployment - This can take several forms. If a person is employed part-time when she/he would prefer a full-time job, the ILO calls this "time-related underutilization of labor" and the U.S. calls it "part time for economic reasons." Underemployment may also mean underutilization of skills (college graduates who are Uber drivers) and it may be caused by overstaffing (for example, in state-owned enterprises).

3.      Marginally Attached Workers - Persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months, but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for a job.. 


C.      Methods of Data Collection

1.      Sample surveys - Considered the best method. Still are sensitive to wording of questions.  Still may miss underground employment.

2.      Registrations at unemployment or social security offices - Many developing countries.

U.S. Unemployment Rates in December 2020 and 2021
by Alternative Definitions 




U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force



U-2 Job losers and persons who completed temporary jobs, as % of the civilian labor force



U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)



U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers



U-5 Total unemployed, plus discouraged workers, plus all other marginally attached workers, as a percent of the civilian labor force plus all marginally attached workers



U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers



Source: U.S. Bureau of Labor Statistics

Oecd Unemployment


D.      International Labor Office (ILO) expanded measures of labor underutilization.

 LU1: Unemployment rate - Follows the standard concepts mentioned above, but ILO data for many developing countries are based on a combination of survey data, employment office registrations, and statistical modeling.

LU2: Takes into account unemployment and involuntary part-time work
Combined rate of time-related underemployment and unemployment

[(persons in time-related underemployment + persons in unemployment) / labour force] x 100

LU3: Takes into account unemployment and "potential labor" that may be "marginally attached" and "discouraged"
Combined rate of unemployment and potential labour force

[(persons in unemployment + potential labour force) / (extended labour force)] x 100

LU4: Takes all of the above into account
Aggregate measure of labour underutilization
[(persons in time-related underemployment + persons in unemployment + potential labour force) / (extended labour force)] x 100

ILO Unemployment Measures

II.         Inflation

US Inflation

A.    Data Collection: Price indexes vary across countries in the quality and quantity of data collected.

1.    Price surveys in market economies

2.    Comprehensive price lists were used in centrally planned economies

B.      Base Years and Chaining: Laspeyres (early base year quantity weights), Paasche (current year weights), Fisher (geometric average of Laspeyres and Paasche), and Chained Price Indexes handle quantity weights differently.  Generally speaking, a Laspeyres index tends to overestimate the rate of inflation (especially in a country experiencing structural change and if the weights are not changed frequently) and a Paasche tends to underestimate inflation. A Fisher Ideal index is more complicated to compute, but is designed to reduce those biases.

The U.S. has moved to Fisher Chained indexes for
GDP deflators (Paashe before 1996), but the  CPI is still a Laspeyres with the weights changed every two years, based on a consumer survey. The EU Harmonized Indices of Consumer Prices are chained Laspeyres indices with the weights updated each January.


C.      Quality Adjustment—during 1995, quality adjustments reduced the measured CPI inflation rate in the U.S. by 1.7 percent, but, according to the Boskin Commission, that adjustment should have been more like 2.3 percent. See the U.S. CPI Home Page.

1.      Direct adjustment - adjust food items for change in package size, adjust cars for change in standard equipment.  In the U.S., mandated pollution control measures were not counted as quality adjustments in 1970, but they were between 1971 and 1999, and now (since the beginning of 1999) they again are not counted as quality improvements. See this page on changes in policy.

2.      Matched Models - limit sample to matching products, rather than price per unit for full sample.

3.      Hedonic Method - statistical technique to find out how much price has changed after allowance has been made for a number of operating characteristics.  In U.S., they are now used in computers (in the PPI since 1991 and in the CPI since 1998), televisions (in the CPI since 1999), appliances (CPI 2000), and a growing number of other products. 

Hedonic Example

D.      Countries that exercise price controls experience:

1.      Open, reported inflation - Occurs because not all prices are controlled or because planners increase prices.

2.      Hidden inflation - Monetary price increases, but not measured.

a.      Hidden transactions - black market or "under the table"
b.      Hidden quality deterioration, false quality improvement, or forced substitution of high-quality for low-quality products

3.      Repressed inflation - Occurs when price controls are effective, and inflationary pressure causes shortages or queues.

Inflation by regions, 1981-2020