A Duration-Sensitive Measure of the Unemployment Rate: Theory and Application

The measurement of unemployment, like that of poverty, involves two distict steps: identiÞcation and aggregation. In this two-step process, the issue of identifying the unemployed has received considerable attention but, once the unemployed have been identiÞed, the aggregation issue has been addressed by simply ‘counting heads’: the unemployment rate is conventionally deÞned as the proportion of the labour force that, on a given date, is unemployed. This, in particular, leads to differences between individuals, in their unemployment experiences being ignored when the unemployment rate is being computed. This paper predicated on the proposition that what matters to a person is not just the fact of unemployment but also its duration proposes a methodology, derived from the measurement of income inequality, for adjusting unemployment rates so as to make them “duration-sensitive”. In consequence, different values of the “duration-sensitive” rate will, depending upon the degree of inequality in the distribution of unemployment duration, and upon the extent to which society is averse to such inequality, be associated with the same value of the conventionally deÞned unemployment rate. A numerical example, based on published data for seven major OECD countries, illustrates the methodology. JEL Classification: J64. Vani K. Borooah School of Public Policy, Economics and Law University of Ulster Newtownabbey, Northern Ireland BT37 0QB United Kingdom e-mail: [email protected] ∗Forthcoming in Labour, August 2002. This paper was written, and then substantially revised, while I was a Fellow at the International Centre for Economic Research (ICER) in Torino, Italy and I am grateful to the Centre for supporting the work. I also thank an anonymous referee whose comments have substantially improved this paper. However, I alone am responsible for its deÞciencies and for any errors that it might contain.