What is Phantom Unemployment? - Definition & Examples

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Did you know that some people pretend to be unemployed? In this lesson, learn how and why they do this and the impact that phantom unemployment has on the economy as a whole.

Definition of Phantom Unemployment

Did you know there is such a thing called phantom unemployment? Believe it or not, there is. Phantom unemployment is when you have people claiming they are unemployed so they can receive unemployment benefits even though they really don't qualify. Supposedly, these people are actively looking to get back into the working world, but in reality, they are not. They have no real intentions of going back to work but want to continue to receive the benefits the government provides to those who actually are actively looking for a job. Because many financial institutions monitor the unemployment rate and adjust their policies based on it, phantom unemployment affects the economy as you'll see later in this lesson.

People who are phantom unemployed have no intention of finding a job
phantom unemployment

Why Would Somebody Do This?

For now, let's talk about why people actually do this.

People do this because they want to get money without having to work, and all they have to do is to meet the local requirements that quantify actively looking for a job.

According to the United States Government Accountability Office, in 2011, the Labor Department paid out $13.7 billion unnecessarily. The primary reasons included in the report include payments to those who have returned to work, those who don't qualify, and those who aren't actively looking for work (the phantom unemployed).

How It Affects the Economy

All this negatively impacts the economy. This is because unemployment figures are based on the number of people that apply for unemployment benefits. When a region has a high unemployment number, it generally means the economy of that region is not that great. It's also a sign of a recession or even depression.

Phantom unemployment can signal a false recession because it inflates the number of unemployed, and inflation falls when unemployment levels are high. Banks often look at the unemployment figure to determine interest rates and whether or not to even give out loans or credit. When unemployment rates get too high, over 10 percent, banks get scared because loans they have given out may default from people being unable to repay them. If people can't pay back the bank, then the bank loses money. And if the bank loses enough money, then the whole banking system can face difficult circumstances. Which leads to a whole lot of people not having money and a devastated economy.

Also, the phantom unemployed are unnecessarily taking money away from the government that could be put to other uses such as funding education and health care.


Here are some examples of phantom unemployment.

Joey is a phantom unemployed. He was working and then lost his job. He applied for unemployment benefits and is now receiving them. He has since lost his desire to go back to work and now relies on his unemployment benefits to live. Even though he has to show that he is actively looking for work, he half-heartedly goes through the process just to make sure he doesn't get hired.

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