# Unemployment and labor underutilization

Data Note · Labor Markets
A lower unemployment rate can accompany unchanged employment if people stop actively searching for work. That possibility makes participation and broader underutilization measures essential to interpreting labor-market slack. The change in the headline rate must be reconciled with the population categories entering its numerator and denominator.

Statistics South Africa's [Quarterly Labour Force Survey findings](https://www.statssa.gov.za/?PPN=P0211&SCH=74511&page_id=1856) distinguish official unemployment, time-related underemployment and the potential labor force through separate LU indicators. The [ILO explanation](https://www.ilo.org/resource/labour-underutilization) defines the potential labor force to include certain people who want employment but do not meet both the job-search and availability conditions for unemployment. It is broader than discouraged jobseekers alone.

## A movement out of search

Consider a hypothetical working-age population of 1,000. Initially, 500 people are employed and 100 are unemployed under the stated search and availability criteria. Another 50 are outside the labor force but in the potential labor force. The remaining 350 are outside both groups.

Official unemployment is 100/(500 + 100), or 16.67 percent. The labor-force participation rate is 60 percent, and the employment-to-population ratio is 50 percent.

Now suppose 20 unemployed people stop searching for labor-market-related reasons while continuing to want work and remaining available. In this example they move into the potential labor force. Employment remains 500; official unemployment becomes 80; the labor force falls to 580; and the potential labor force rises to 70.

The official unemployment rate falls to approximately 13.79 percent, but the employment-to-population ratio remains 50 percent. No additional person has found work. Participation falls to 58 percent.

## Widening the denominator consistently

A combined unemployment-and-potential-labor-force measure uses the extended labor force as its denominator:

\[
LU3=\frac{U+PLF}{LF+PLF}\times100.
\]

The initial value in the example is 150/650, or approximately 23.08 percent. After the movement out of search, it remains 150/650. The broader measure preserves the unfulfilled employment demand captured by the assumed reclassification.

This does not mean that every person outside the labor force belongs in the potential labor force. The relevant desire, availability and search conditions must be satisfied. Adding all nonparticipants to unemployment would create a different and generally uninformative measure.

People in time-related underemployment are already employed. They want and are available for additional hours while meeting the applicable hours criterion. Adding them to a broader underutilization numerator addresses insufficient work among employed people; it does not turn them into unemployed people. LU2 and LU4 incorporate this margin under their respective definitions.

## Interpret transitions and breaks carefully

A rise in participation can initially raise measured unemployment if new jobseekers have not yet found work. Conversely, withdrawal can lower the rate. Neither result should be described as an employment gain or loss without checking the employed population and the underlying transitions.

International or historical comparisons also need the same statistical framework. A series labeled expanded unemployment should not automatically be spliced to a newly published potential-labor-force or composite-underutilization series. Similar labels do not establish identical operational definitions.

Changes in population weights or questionnaire design can also interrupt comparisons. When an agency provides a revised historical series, that series should be used consistently rather than attaching the newest definition to an older unadjusted observation.

For South African analysis, a compact labor-market table should retain employment, unemployment, participation and the applicable LU measures together. The unemployment rate describes the share of the active labor force without work under its criteria. Broader indicators describe additional unmet labor supply. Reading both provides a more complete account of spare capacity than interpreting a denominator-driven decline as evidence that the demand for work has been satisfied.

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American Economic Senate