The unemployment rate as a measure of recessions

by on February 27, 2009 at 12:10 pm in Economics | Permalink

I wonder if it is as good a measure of economic severity as it used to be.  The greater the heterogeneity of the labor force, the greater the potential for underemployment.  Even if the downturn is bad, I am not sure unemployment will stay above ten percent for long.  New search and matching technologies, such as found on the internet, might create quicker job pairings, albeit with continuing underemployment.  Unemployment is of course important but let us not view this category in purely binary terms.

1 mk February 27, 2009 at 12:19 pm

Interesting… is there a metric for underemployment? Can we measure the number of people who have recently jumped jobs, and measure the percentage of them for whom the new job is significantly lower paying and/or a different line of work?

2 dude February 27, 2009 at 12:25 pm

Collapsing housing market decreases worker mobility due to lack of buyer demand. Home ownership essentially becomes a trap of sorts.

3 save_the_rustbelt February 27, 2009 at 12:37 pm

I’ve been saying this for years, but being a humble accountant no one has been listening.

Underemployment is especially serious for former manufacturing workers, who are selling nuts and bolts at Wal-Mart and Home Depot, if they are lucky.

4 Ano February 27, 2009 at 1:19 pm
5 Virginia February 27, 2009 at 2:23 pm

Although the risk of outright job loss declined from the early ’80s to 2007 (during the “Great Moderation”), the volatility of household consumption actually increased a bit. It appears that employment has gone from the binary model to something more flexible, which implies a degree of underemployment in downturns:,_NBER_version.pdf

6 Garrett Schmitt February 27, 2009 at 2:25 pm

Any measure of underemployment beyond “employed part time for economic reasons” is going to be rather difficult to measure in an objective way. There is enough popular contention over the definition of unemployment and its objective measurement.

For instance, one of the most frequent concerns I hear concerning the measurement of unemployment is the “active search” requirement, which consists of questions looking as to whether a respondent who is not employed and is available for work has conducted some action which could directly result in a job offer over a given period of time. If the respondent isn’t actively looking for a job (as explicitly defined), they are considered outside of the labor force, neither employed nor unemployed…

…but what if the respondent has stopped looking because of the perception that there are no jobs to be had? What if the respondent gives this excuse insincerely? I see real difficulties in objectively measuring perceptions and rationalizations of action, instead of the actions themselves (which would be costly enough to verify if we bothered doing so, which we don’t). I personally think perceptions explain some regional variations in unemployment across the US, which are compensated by differing levels of labor-force participation.

This problem is only magnified in the case of underemployment, whose definition has not been operationalized at all, as far as I’m concerened. Are there concrete actions which indicate underemployment, or is this category separated from employment by perception alone? Should underemployment include persons who consider themselves underemployed because they overvalue their own skills? Is a bad artist working in a fast food restaurant underemployed, when even in good times this artist could not sell any work? Will the category of “not-underemployed” solely include people who consider themselves either overpaid or products of the Peter Principle?

Survey reticence is a thorny enough issue as it is.

7 ah February 27, 2009 at 3:18 pm

Why is labor mobility better now? In the 1900s a lot of labor was basically physical. Now it relies much more on specific skills that aren’t necessarily transferable, or as easily transferable.

I could see this going either way.

Certainly the speed of matching should have increased through technology.

8 JH February 27, 2009 at 3:47 pm

Is it really underemployed if you have advanced skills that no one needs?

9 Blackadder February 27, 2009 at 4:46 pm

Tyler argues that changes in the nature of the economy mean that the unemployment rate understates the severity of the recession. I would tend to think it was just the opposite. A 10% unemployment rate (or whatever) means a lot more in a society where each household typically has a single breadwinner than it does in a society where most women work outside the home.

10 Scott Sumner February 27, 2009 at 5:14 pm

Just thinking out loud here, but I wonder whether the “what’s the best measure of recessions?” question depends on what aspect of recessions we are trying to measure. I could imagine scenarios where the fall in GDP is the best measure of the loss in living standards
(for reasons Tyler mentions.) However unemployment might be the best metric of the need for
policies to stimulate demand. Think of a Central American economy devastated by a hurricane where the public is all hard at work clearly up the damage. Real output falls (with the
loss of capital) but pumping money into the economy to boost employment would be pointless. Alternatively, if unexpected deflation raised real wages and increased unemployment, then the unemployment rate might be the best measure of the economic slack that needed to be addressed with demand stimulus. Still other scenarios are also possible.

11 bl February 27, 2009 at 6:53 pm


Tyler, would comment on this:

Yale’s Tobin Guides Obama From Grave as Modern Keynesians Eclipse Friedman

12 Henry Blankett February 27, 2009 at 10:07 pm

It’s impossible to have a legitimate discussion on unemployment and resultant underemployment when we’re dealing with government-supplied unemployment figures. Officially, unemployment has hit anywhere between 10%-12% in California and Ohio. In reality, the true figures are closer to 20%.

13 ZBicyclist February 27, 2009 at 10:41 pm

@Save_the_rustbelt, writing “Underemployment is especially serious for former manufacturing workers, who are selling nuts and bolts at Wal-Mart and Home Depot, if they are lucky.”

Is that “underemployment”, or less pay? Those aren’t the same thing. A former journeyman plumber working at Wal-mart is underemployed. A former unionized laborer working at Wal-mart is lowly paid.

14 Daniel Reeves February 28, 2009 at 8:32 am

So the NAIRU decreased because frictional unemployment has decreased. There’s still cyclical unemployment, Professor Cowen.

15 David Heigham February 28, 2009 at 10:33 am

What I have hankered for, since about three recessions ago, is a decent measure of the change in the underemployment of labour; and a similar one for capital. If we had both, we might understand business cycles a bit better.

16 Mick February 28, 2009 at 12:47 pm

I wonder if it is as good a measure of economic severity as it used to be.

In Peoples Republic of Tenured Academia there is always boom times and there is employment for life regardless of competence or usefulness.

What makes Dr. Cowen, a citizen in good standing of the mentioned Republic, qualified to talk about unemployment?

The greater the heterogeneity of the labor force, the greater the potential for underemployment.

Is this supposed to be self-evident or you have some data to back it up?

Even if the downturn is bad, I am not sure unemployment will stay above ten percent for long.

What makes 10% unemployment a magic number? Why it can stay above 9% for long, but not 10%?

What is the difference between hand-waving and economics philosophizing?

17 Anthony February 28, 2009 at 2:49 pm

So is it “underemployment” or “the efficient reallocation of labor resources”?

Should there perhaps be a complementary term “overemployment”, when people are employed in positions where they are paid significantly more than the value they create, for example, unionised auto workers, MBAs, and Congressmen?

18 Dwight from Cleveland March 1, 2009 at 3:02 am

I think from a policy making standpoint, unemployment and under employment can be a red herring and an exercise in futility. A few of the reasons have been mentioned. Take two unemployed people, and you will find that they have very different perspectives and situation as a result.

For instance, let us say one person unemployed is the ex- CEO of Lehman Brothers. He left work with his $10 million separation package. The other is a line worker from a factory that used to supply parts to GM. He left work being paid for his unused vacation and his last weeks pay. About $700.

The biggest problem for the economy and the issue that policy makers are going to have to deal with is that in about 2 months the second guy is going to go from contributing to the economy to a draw on it. While the first guy will probably never have to draw unemployment, foreclose on his house, or even reduce his spending habits.

What if the top 10% wealth holders of the US suddenly became unemployed? Would the economy even flinch? Probably not. Simply counting unemployment (and underemployment) numbers without assigning a magnitude of impact on the economy is as useful as accepting payment counting only the number of bills with out any consideration of each bills denominations.

19 Dwight From Cleveland March 2, 2009 at 1:24 pm

Please forgive my double post. I thought the “next” link referred to the next blog post and I had not entered the security code properly. Moderator, feel free to delete the duplicate and this post if desired. Thank you for the opportunity to comment.

20 Raționalitate March 3, 2009 at 6:21 pm

Looks like the divergence between unemployment and underemployment is especially relevant in Italy, though I don’t see any reason why decreased search costs would be more to blame in Italy than in anywhere else in the developed world.

21 Euro Millions March 6, 2010 at 11:08 am

How ’bout recessions as a measure of unemployment? Just because people have a job doesn’t mean they are effectively employed.
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22 Pinch March 3, 2011 at 7:44 am

Maybe the government should hire a professional peo services company in order to solve the unemployment problem. There are so many solutions that could be applied so people won’t have to suffer, but the government seems to invest money in others things than the happiness of the general population.

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