Chinas Unemployment Rate A Useless Statistic?

A Method to the Madness is Revealed

Summary: As is well known, nobody really believes the official figures for the unemployment rates for China. Some economics professors have resorted to their own surveys. Nonetheless, an analysis of the unemployment rate, r, and the labor force, x, compiled at www.indexmundi.com, for example, reveals a remarkable pattern that has also been observed in many other countries. A simple linear law, of the type E = mx + b, can be shown to relate the labor force, x and the number of employed workers, E, in agreement with similar observations made for other advanced economies like the USA, Germany, Australia, United Kingdom, Singapore, Scandinavia, to mention just a few. This leads us again to the universal law governing the employment (or unemployment) problem and also the long abandoned notion of achieving full employment. A careful study and analysis of the available data and a deeper understanding of the fundamental reasons for the high job creation rates now being observed in many countries is needed to formulate policies that can indeed usher in an era of full employment, globally.

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As is well known, nobody really believes the official figures for the unemployment rates for China, see the three recent news articles, cited as Refs. [1-3], with brief notes attached to them. For Chinas ruling communist party, it is obviously extremely important to maintain the official position of a low unemployment rate.
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Nonetheless, private surveys are being conducted by economics professors to gain some insights into the real unemployment rate. One such survey reveals almost double the urban unemployment rate, 8.05% in June 2011, according economics Professor Gan Li, Ref. [2], compared to the official figure of 4.2%.

Table 1: China Unemployment Data for (1998-2012)

Year Unemployment rate, r % 100*(y/x) Labor force, L=x (millions) 700 706 744 760.8 Unemployed, U=y (millions) Employed, E = (x y) (millions)

1998 2000 2001 2003 10.1 2004 9.8 791.4 77.56 2005 9 798 71.82 2006 4.2 800.7 33.63 2007 4 807.3 32.29 2008 4.3 813.5 34.98 2009 780 2010 6.5 2011 795.5 2012 Source: http://www.indexmundi.com/g/g.aspx?v=72&c=ch&l=en

713.84 726.18 767.07 775.01 778.52

Nonetheless, an analysis of the unemployment rate, r, and the labor force, x, compiled at www.indexmundi.com , for example, reveals a remarkable pattern that has also been in many other countries, see Refs. [4-12]. Only the values for the unemployment rate, r, in the first column of Table 1 and the labor force, x (or L), in the second column, are given. There are some gaps in the data, as highlighted. From the r and x values it is possible to calculate the number of the unemployed workers y (or U) and the number of employed workers, E = (x y). Although the variations in the unemployment rate has engaged our attention, not only for China but for other countries as well, such as the United States (with the
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economy still looking for ways to spur jobs creation) and Brazil (with an economy approaching full employment, with sluggish GDP growth), and Sweden (with its high per capita incomes and also high unemployment rates which economists claim is due to people who should be working who are not actually working), it is clear that we are overlooking the relationships between the variables r, x, y, and E. The E-L (or E-x) graph, in particular, can be shown to yield a remarkably simple and linear relationship, of the type E = mx + b, which is universally valid for all countries, big and small. This has been discussed in several recent articles by the present author, which may be found at this website, see reference list. The main purpose here is to call attention to the fact that an exactly similar linear relation is also observed for China, if we analyze the figures compiled in Table 1. This is illustrated in Figure 1.

Employed, E = (x y) [millions ]

800.0 780.0 760.0 740.0

720.0
700.0 680.0 780.0

Operating Best-fit Employment line, E = mx + b E= 3.152x 1776.8

790.0

800.0

810.0

820.0

Labor Force, x [millions]

Figure 1: The E-L graph (employed workers E and labor force L) for China for the years 2005-2009, based on the data compiled in Table 1.

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The E-L data (employed workers E and labor force L), for the years 2005-2009, from Table 1, reveals a nice upward trend. The data seem to fall approximately on a straight line with the general equation E = mx + b. The numerical values of the slope m and intercept b for the best-fit line through the data points can be determined, using the method of least squares (click here), also known as linear regression analysis. This reveals a rather high slope m = 3.125 >> 1 which means that the number of employed workers is increasing at a must faster rate than the increase in the labor force, i.e. E > x where E is the change in the number of employed workers and x is the change in the labor force.

100.0

Unemployed, y [millions ]

80.0

60.0

40.0

20.0

Unemployment law, y = hx + c y= -2.152x + 1776.8 h = (1 m), c = - b

0.0 780.0

785.0

790.0

795.0

800.0

805.0

810.0

815.0

820.0

Labor Force, x [millions]

Figure 2: The U-L graph (unemployed workers U versus labor force L) for China for the years 2005-2009, based on the E L relationship deduced from the data compiled in Table 1.

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Since the number of unemployed workers U = y = (L E) = (x E), it follows that the x-y relation (unemployed y versus labor force x) must be given by y = hx + c where the slope h = (1 m) and the intercept c = - b. This is illustrated in Figure 2. The unemployment law y = hx + c immediately implies that the unemployment rate r = y/x = h + (c/x) will decrease with increasing labor force x since the slope h = -2.152 < 0. Thus, the x-y graph must have a negative slope. The ratio y/x will decrease as we move down a straight line with a negative slope to increasing values of x. Hence, the unemployment rate will decrease as the labor force increases. This is confirmed when we examine Table 1. Finally, as noted in several recent articles, see reference list, for many different countries, where the numerical values of the unemployment rates are NOT considered to be so unreliable and where the methods of counting used are quite sophisticated (e.g. USA, Germany, Australia, United Kingdom), the rather high value of the slope m of the E-L graph implies that the operating employment line will, on extrapolation, intersect with the full employment line, with the mathematical equation E = x. Thus, we arrive at a critical labor force, given below. Critical labor force xcr = b/(1 m) ..(1)

This is obtained by equating E = x = mx + b. With m >> 1, the critical labor force represents a labor force that will be attained in the near future. The slope m of the E-L graph is a numerical measure of the rate of increase of employed workers, or the jobs creation rate. Since E >> x, this means that the economic activity is sufficiently robust to increase the number of employed workers well above the increase in the labor force. This means that the new entrants to the labor force (this is a delayed effect of the increase in population which is felt some 18 to 25 years later, depending on the educational qualifications of the new job seekers high school or college graduates with advanced degrees) are able to find a job. Furthermore, unemployed workers who lost their jobs and are looking for work are also able to find a job. This reduces the employment gap and the number of unemployed will decrease. Eventually, if the high rate of job creation can be sustained, the extrapolated operating employment line will intersect with the full employment E = x at some critical labor force that will be attained in the future. The higher the slope m, the lower the critical labor force.
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This is the situation revealed for the USA, if we consider the data for 2010 to 2012. Indeed, the slope m = 3.135 is virtually identical to the slope determined here for China. Similar high values of m > 1 are also observed for Germany, Brazil, Australia and the United Kingdom (with some deviation from this high slope for the last two in recent years). The potential for full employment thus exists in several economies, including China, as revealed here in the graph prepared in Figure 3. The critical labor force is indicated by the solid blue dot.

Employed, E = (x y) [millions ]

880.0

840.0

Full Employment line, E = L = x xcr = b/(1 m)

800.0

760.0

720.0

Operating Best-fit Employment line, E = mx + b E = 3.152x 1776.8

780.0 800.0 820.0 840.0 860.0 880.0

680.0 760.0

Labor Force, x [millions]

Figure 3: The E-L graph (employed workers E versus labor force L) for China, illustrating the feasibility of attaining full employment. To sustain the rather high operating slope m = 3.152 >> 1, we must understand more fully the contributing factors that lead to the high job creation rate implied by this steep slope.

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In conclusion, as also noted in earlier articles, Refs. [4-17], it appears that we can actually design an economy to work consistently to deliver jobs just like we can design cars, airplanes, rockets, satellites, TVs, cellphones, washing machines, and refrigerators and other modern scientific and engineering marvels that deliver the desired output every single time they are turned on. Professional economists and business and political leaders, all over the world, must come together to formulate policies that indeed promote the long abandoned, but eminently worthy, societal goal of full employment, see Pollin, Ref. [18], with Brazil being a notable exception in recent years, see Ref. [12].

8.4

Unemployment rate, r%

8.3 8.2 8.1 8.0 7.9 7.8 7.7 0 2 4 6 8 10 12 14

Time, t [month number, since Dec 2011]

The graph of the unemployment rate r (%), plotted on the vertical axis, versus the month number since December 2011 (Jan 2012 is month one), plotted on the horizontal axis. The unemployment rate dropped dramatically, from 8.1% to 7.8%, between August and September, just before the Presidential elections and the GOP even threatened to appoint a committee to investigate the manipulation of the unemployment statistics by the BLS.

The general distrust of economic data, even the data compiled by the US Bureau of Labor Statistics (especially favorable data when the President is from the wrong
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party, as it happened in the months before the US Presidential election of 2012), not to mention the data from China and Brazil, might just be related to the exclusive focus on the ratio y/x, or the unemployment rate. This appears to have been a serious detriment to the understanding of the more universal nature of the laws governing the employment, or unemployment, problem, such as the E-L and U-L laws revealed by the simple analysis (but one that is, nonetheless, rooted in well-established scientific principles) presented here.

References cited:

1. Is Chinas official unemployment rate totally off? The Atlantic, by Brian Fung, Dec 10, 2012 , Urban unemployment rate 8.05% (nearly double the official rate of 4.2%) based on survey of 8,000 Chinese households; migrants workers not counted since they cannot apply for unemployment benefits (to be counted in government statistics). http://www.theatlantic.com/international/archive/2012/12/is-chinas-officialunemployment-rate-totally-off/266101/ 2. Chinese survey shows higher jobless rate, The Wall Street Journal, by Tom Orlik, Dec 8, 2012 http://online.wsj.com/article/SB10001424127887323316804578164784240097 900.html 3. Why no one believes Chinas unemployment rate? Business Insider, By Adam Taylor, Oct 5, 2012 http://www.businessinsider.com/chinasunemployment-rate-useless-2012-10 Official figure is 6.5% (as of Oct 2012). Method of counting is not sophisticated, high mobility of the labor force, does not account for migrant workers. Could be as high as 19% or 33% in 2009. 4. The Unemployment Rate: What is the Universal Law Describing the Employment Data? in preparation, to be published shortly. 5. Is full employment feasible? Analysis of the recent US Employment Data (2001-2012) Published February 14, 2013
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6.

7.

8.

9.

http://www.scribd.com/doc/125452243/Is-Full-Employment-Feasible-Analysisof-the-recent-US-Employment-Data Growing the US Economy-I: The Obama Frist Term Record, Published February 12, 2013 http://www.scribd.com/doc/125093206/Growing-the-USEconomy-The-Obama-First-Term-Record Growing the US Economy-II: Look Beyond the Unemployment Rate, Published February 15, 2013 http://www.scribd.com/doc/125602428/Growingthe-US-Economy-II-Look-Beyond-the-Unemployment-Rate (Current article) The Highest US Unemployment Rate: The Obama years and Historical Data (1941-2011) Published July 12, 2012 http://www.scribd.com/doc/99857981/The-Highest-US-Unemployment-RatesObama-years-compared-with-historic-highs-in-Unemployment-levels The US Unemployment Rate: What happened in the Obama years? Published July 10, 2012 http://www.scribd.com/doc/99647215/The-USUnemployment-Rate-What-happened-in-the-Obama-years

10.Is full employment feasible? Analysis of the Jobs Creation rate for Germany for the period (1999-2011) Published February 17, 2013 http://www.scribd.com/doc/125862643/Is-Full-Employment-Feasible-Analysisof-the-Jobs-Creation-Rate-for-Germany-for-the-period-1999-2011 11.Is full employment feasible? Analysis of the Jobs Creation rate for Malaysia for the period (1999-2012) and comparison with Singapore, Australia and United Kingdom, Published February 18, 2013 http://www.scribd.com/doc/126081920/Is-Full-Employment-Feasible-Analysisof-the-Jobs-Creation-Rate-for-Malaysia-for-the-period-1999-2011-andcomparison-with-Singapore-Australia-and . 12.Is full employment feasible? Analysis of the Jobs Creation rate for Brazil for the period (1997-2011) and brief comparison with Sweden, Published February 21, 2013 http://www.scribd.com/doc/126583857/Is-Full-EmploymentFeasible-Analysis-of-the-Jobs-Creation-Rate-for-Brazil-1997-2011-and-briefcomparison-with-Sweden 13.A First Look at Australian Unemployment Statistics: A New Methodology for Analyzing Unemployment Data, Published July 19, 2012.
http://www.scribd.com/doc/100500017/A-First-Look-at-Australian-UnemploymentStatistics-A-New-Methodology-for-Analyzing-Unemployment-Data

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14.A Second Look at Australian 2012 Unemployment Data, Published July 22, 2012 http://www.scribd.com/doc/100720086/A-Second-Look-at-Australian2012-Unemployment-Data 15.Further Evidence for a Universal Constant h and the Economic Work Function: Analysis of Historical US (1941-2011) and Canadian (1976-2011) Unemployment Data, Published July 24, 2012 http://www.scribd.com/doc/100910302/Further-Evidence-for-a-UniversalConstant-h-and-the-Economic-Work-Function-Analysis-of-US-1941-2011-andCanadian-1976-2011-Unemployment-Data 16.An Economy Under Stress: Preliminary Analysis of Historical Unemployment Data for Japan (1953-2011), Published July 24, 2012 http://www.scribd.com/doc/100939758/An-Economy-Under-StressPreliminary-Analysis-of-Historical-Unemployment-Data-for-Japan 17.Further Empirical Evidence for the Universal Constant h and the Economic Work Function: Analysis of Historical Unemployment Data for Japan (1953-2011) Published July 24, 2012 http://www.scribd.com/doc/100984613/Further-Empirical-Evidence-for-theUniversal-Constant-h-and-the-Economic-Work-Function-Analysis-ofHistorical-Unemployment-data-for-Japan-1953-2011 18.Back to Full Employment by Robert Pollin, MIT Press http://mitpress.mit.edu/books/back-full-employment

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About the author V. Laxmanan, Sc. D.

The author obtained his Bachelors degree (B. E.) in Mechanical Engineering from the University of Poona and his Masters degree (M. E.), also in Mechanical Engineering, from the Indian Institute of Science, Bangalore, followed by a Masters (S. M.) and Doctoral (Sc. D.) degrees in Materials Engineering from the Massachusetts Institute of Technology, Cambridge, MA, USA. He then spent his entire professional career at leading US research institutions (MIT, Allied Chemical Corporate R & D, now part of Honeywell, NASA, Case Western Reserve University (CWRU), and General Motors Research and Development Center in Warren, MI). He holds four patents in materials processing, has co-authored two books and published several scientific papers in leading peer-reviewed international journals. His expertise includes developing simple mathematical models to explain the behavior of complex systems. While at NASA and CWRU, he was responsible for developing material processing experiments to be performed aboard the space shuttle and developed a simple mathematical model to explain the growth Christmas-tree, or snowflake, like structures (called dendrites) widely observed in many types of liquid-to-solid phase transformations (e.g., freezing of all commercial metals and alloys, freezing of water, and, yes, production of snowflakes!). This led to a simple model to explain the growth of dendritic structures in both the ground-based experiments and in the space shuttle experiments. More recently, he has been interested in the analysis of the large volumes of data from financial and economic systems and has developed what may be called the Quantum Business Model (QBM). This extends (to financial and economic systems) the mathematical arguments used by Max Planck to develop quantum physics using the analogy Energy = Money, i.e., energy in physics is like money in economics. Einstein applied Plancks ideas to describe the photoelectric effect (by treating light as being composed of particles called photons, each with the fixed quantum of energy conceived by Planck). The mathematical law deduced by Planck, referred to here as the generalized power-exponential law, might actually
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have many applications far beyond blackbody radiation studies where it was first conceived. Einsteins photoelectric law is a simple linear law and was deduced from Plancks non-linear law for describing blackbody radiation. It appears that financial and economic systems can be modeled using a similar approach. Finance, business, economics and management sciences now essentially seem to operate like astronomy and physics before the advent of Kepler and Newton. During my professional career, I also twice had the opportunity and great honor to make presentations to two Nobel laureates: first at NASA to Prof. Robert Schrieffer (1972 Physics Nobel Prize), who was the Chairman of the Schrieffer Committee appointed to review NASAs space flight experiments (following the loss of the space shuttle Challenger on January 28, 1986) and second at GM Research Labs to Prof. Robert Solow (1987 Nobel Prize in economics), who was Chairman of Corporate Research Review Committee, appointed by GM corporate management.

Cover page of AirTran 2000 Annual Report Can you see that plane flying above the tall tree tops that make a nearly perfect circle? It requires a great deal of imagination to see and photograph it.
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