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Unemployment has decreased, according to the latest figures. Here is a question: if the unemployment rate drops, is everyone happy?

Suppose that, in a very small country, 380 people are either working or would like to work (this group is the labour force), and suppose 38 of these are unemployed. The unemployment rate is 38 out of 380, or 10%: that is the ratio of the unemployed to the labour force. Here are two scenarios.

Scenario 1: suppose that 19 of the unemployed instantly obtain jobs. Now the unemployment rate drops to 19 out of 380 or 5%.

Scenario 2: suppose that 20 of the unemployed stop seeking work. This removes them from the labour force. The unemployment rate is now 18 out of 360, or 5%.

In each of these scenarios the unemployment rate drops to exactly the same figure but for opposite reasons. A government spruiking its economic credentials would welcome Scenario 1 but hide from Scenario 2. The above scenarios, along with many economic arguments, make a good case to treat the unemployment rate with caution.

Whereas one can use economics to ask “has the unemployment rate fallen for the right reasons?”, it’s possible to use mathematics to ask “has the unemployment rate fallen at all?”


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