The real unemployment rate?

by on February 1, 2012 at 2:51 pm in Data Source, Economics | Permalink

Similar variations of this adjusted unemployment rate make headlines now and again. Our colleague Ed Luce, for instance, noted in December that “if the same number of people were seeking work today as in 2007, the jobless rate would be 11 per cent”.

But what is striking about the broken line above isn’t where it now ends — at 10.3 per cent — but rather the lack of any meaningful, sustained improvement for more than two years.

This alternative measure has remained above 10 per cent since September 2009, and aside from a bit of skittishness (some of which is down to uncaptured seasonality) has mostly just moved sideways.

That is from Cardiff Garcia, here is more.

1 Naveed moghadam February 1, 2012 at 3:04 pm

Couldn’t one argue that in 2007 the economy was operating over capacity therefore those numbers are overstated?

2 Rich Berger February 1, 2012 at 3:18 pm

Sure you could, but I don’t think it would be very persuasive. Better to attribute the current levels to the discovery of funemployment in the Obama era. Work is the curse of the leisure class – Obama shall set you free.

3 Jamie February 1, 2012 at 3:48 pm

Right, because everything is lolitics. Typo intentional.

4 Bill February 1, 2012 at 4:03 pm

Or could it be that you did not adjust also for retiring baby boomers. Discouraged workers is a different issue than the same number of workers for two different periods.

5 Careless February 1, 2012 at 7:43 pm

All those sub-65 year olds voluntarily retiring after the stock market crashed? Seems likely.

6 Bill February 1, 2012 at 9:44 pm

Crashed and came back.

7 Andrew' February 2, 2012 at 8:36 am

It’s still not back. Certainly not investor returns. Not everyone held a total market index all the way down and back up.

8 Matt Waters February 1, 2012 at 7:58 pm

So how does a economy operate “over capacity?” That’s like saying a factory capable of producing only 1,000 cars somehow produced 1,500 cars. If the factory produced 1,500 cars, then its capacity is really at least 1,500, not 1,000.

That doesn’t mean that markets don’t become overvalued or that the economy produces things that people don’t ultimately want. If unemployment consisted of only workers related to housing and banking, then there’s an argument to be had there.

However, most unemployment is really across the board. After housing construction had already substantially declined in 2008, unemployment was still around 5%. Since then, employment has been hurt significantly because Americans have reduced their standard of living. Americans have held onto cars longer, share more houses, take less trips, etc. Americans also pay less in taxes, forcing a reduction in the standard of living through government spending, i.e. less teachers and police officers. You could say that it’s because Americans are broke, but the monetary base is triple what it was in 2008. There’s three times the money out there. How in the world are Americans, as a whole, broke?

9 Andrew' February 2, 2012 at 4:09 am

Capital consumption, as described by Robert Murphy, is one way. I’m sure there are others.

10 Todd February 1, 2012 at 3:16 pm

Both lines still look a heck of a lot better than they did ’07-’09.

11 Andrew' February 1, 2012 at 3:25 pm

Howz’at?

12 Bill February 1, 2012 at 4:58 pm

Now you have two Bills to deal with.

13 Very Serious Sam February 2, 2012 at 2:48 am

I guess that’s because in 07-09 they jumped up, since then not anymore. BTW, if the development since 09 is thanks to the Obama goverment, the 07-09 deterioration must be Bush’ government doing, no?

14 Andrew' February 2, 2012 at 4:43 am

Weird and fuzzy math that one would care more about the rate of unemployment than the level. It took me 12 hours to even figure out what they could possibly mean.

15 Andrew' February 2, 2012 at 4:44 am

Do people out there really think it would have kept going to infinity?

16 mulp February 2, 2012 at 1:31 pm

They could have gone to 25% or even 50%.

17 Al Brown February 4, 2012 at 8:26 pm

I see a car wreck by the side of the road. Its much better off than it was a few minutes ago when it was actually crashing.

18 Bill February 1, 2012 at 3:22 pm

While it might be better if both lines were going down (not just the unemployed), the fraction of unemployed including people who have left the labor force will certainly go down more slowly, because the people in the extra group have left the labor force and are not looking for jobs. Perhaps they are staying in school, or staying home to take care of the kids because they cannot afford day care. But the number cannot go down if the individuals are not looking for jobs.

19 Rich Berger February 1, 2012 at 3:49 pm

Then again, maybe they are Obama supporters who are staying out of the labor force to make him look better. Yes We Can (occupy a couch)!

20 Bill February 1, 2012 at 4:05 pm

Rich, this was a different Bill than the other Bill you instinctively challenge.

21 Rich Berger February 1, 2012 at 4:26 pm

Who is/was that – Bill O’ Goods? It is difficult to tell one Bill from another on the internet. There is only one Tyler Cowen, in any case.

22 Bill February 1, 2012 at 4:59 pm

Nowyouhave two Bills to deal with.

23 Andrew' February 1, 2012 at 6:07 pm

The Bills are too damn high!

24 TallDave February 4, 2012 at 12:45 am

Disambiguate?

25 Finley February 1, 2012 at 3:23 pm

This is why I prefer the employment-population ratio (http://data.bls.gov/timeseries/LNS12300000) as a first pass employment statistic.

26 KLO February 1, 2012 at 3:30 pm

What scares me about this is that given our current demographics, you would have expected the employment to population ration to be peaking right now. Instead, we have dropped off a cliff just before any of the boomers are eligible for social security. Younger workers are getting killed and I don’t think there is much reason to believe that the situation for them will improve with age.

27 Andrew' February 1, 2012 at 3:50 pm

And do companies have good succession plans for those retirees? That’s a rhetorical question.

28 Zach February 1, 2012 at 4:03 pm

The labor participation rate of people over 65 is increasing (long-term, because of better health; short-term, because of the recession), which might soften the blow a bit? Also, if there were any shocking effect from boomers retiring we probably would’ve noticed it by now… the baby boom was long, and the options of early/late retirement for Social Security dampens the effect on top of that.

29 Bill February 1, 2012 at 4:14 pm

Someone should do an elasticity measure of wealth to age of complete or total retirement to test this.

30 Matt Waters February 1, 2012 at 7:59 pm

There is a measure precisely for this, employment-to-working age population. And it has looked absolutely terrible.

31 dbeach February 2, 2012 at 2:36 pm

How do you figure we are “before any of the boomers are eligible for social security”? The first boomers became eligible for social security in 2006, when they turned 62. Around two-thirds of people, born in 1946, who will reach age 66 this year (their full retirement age) are already collecting social security.

32 Really Curious February 1, 2012 at 3:34 pm

how do we know that people dropping out of the labor force is a bad thing ? maybe those people dropped out to go to school to upgrade their skills ?

33 FYI February 1, 2012 at 4:11 pm

That is important for sure. Also, there is a ‘social factor’ in getting some people out of the workforce. People who just can’t adapt to new technologies and will not come back to the work force. There is some impact on the economy but I guess this is inevitable, and eventually benefits newcomers.

So I am not totally convinced that counting people who gave up is that meaningful. If you really, really need to work you won’t give up.

34 Rob February 1, 2012 at 4:22 pm

I would feel a lot better about this line of reasoning if youth unemployment showed any signs of going down… but (at least in the graph I glanced at on Felix Salmon’s post about it) that doesn’t seem to be happening.

35 FYI February 1, 2012 at 6:50 pm

Well, maybe youth unemployment would be even higher if these people were not leaving the workforce… This is really just anecdotal experience but it seems to me that a large part of people leaving the workforce are women who were contributing as a second income or older people who were postponing retirement. Now, maybe they will come back to the work force later but is it really a disaster that these people (who can afford at some level to do so) are leaving the job market? It just sounds to me that this is the least evil and that it actually helps society instead of bringing it down. Probably not great for GDP but in other aspects (like mothers spending more time with family or freeing up career paths for younger workers) it might be beneficial.

36 Nylund February 1, 2012 at 4:38 pm

It’s also when the opportunity costs of returning to school are at their lowest. Returning to school during a boom means lots of foregone income, but if you’re already unemployed, underemployed, or working some low-paying job, then the foregone income is less of an issue. If you can get into a program where a scholarship/fellowship covers your tuition and you receive a stipend (as is often the case with Econ Ph.D.’s), then it’s even better. In some cases dropping out of the labor force may actually be the best choice in the long run for the individual (and maybe even society depending if you believe human capital is a public good.)

37 JWatts February 1, 2012 at 5:13 pm

“how do we know that people dropping out of the labor force is a bad thing ? maybe those people dropped out to go to school to upgrade their skills ?”

If they aren’t working and paying taxes it’s a bad thing. There isn’t any sign that many additional people are actively training/learning. So other than some data-less wishful thinking, it’s a bad sign.

38 Zach February 1, 2012 at 3:37 pm

That chart comes from Nomura Global Economics; the black line comes from BLS. Your link provides now information as to how Nomura calculated the dashed line. It’s the inverse of the employment:population ratio, mirroring it perfectly. Why not stick to a chart with a verifiable methodology?

39 Vuk Vukovic February 1, 2012 at 4:11 pm

the broken line, including unemployed exiting the labour force, is a mirror image of the employment-population ratio:
http://im-an-economist.blogspot.com/2012/01/understanding-unemployment.html

It’s volatile around 58.5 (or 10.5 if looking at unemployment) and shows no apparent positive trend.

40 TA February 1, 2012 at 4:19 pm

I’m with the folks who like the employment-population ratio to tell this story. If you go to the BLS website, they’ll even draw the chart for you, for various age ranges, male, female, etc — at least they will when their site works, which isn’t always.

41 Zach February 1, 2012 at 6:10 pm

Employment:population should be decreasing somewhat because the fraction of people 16+ that are retired is increasing.

42 NAME REDACTED February 1, 2012 at 4:23 pm

This is consistent with increasing non-compensation costs to hire labor, but not with an AD shortfall.

43 Matt Waters February 1, 2012 at 8:03 pm

Huh? It’s definitely consistent with an AD shortfall if wages are sticky.

In truth, either higher non-compensation costs or AD shortfalls can explain any increase in unemployment, if you have no other data. But there actually is data on AD as well as which non-compensation costs have increased and how much. For the latter, there just isn’t any evidence to show that non-compensation costs created unemployment. There is some evidence for 99 weeks of UI decreasing search time and thus increasing the structural rate of unemployment. But one can find that effect by comparing unemployment duration of those UI-eligible vs. those not UI eligible and it simply is not significant. Everything else is AD and sticky wages.

44 The Other Jim February 1, 2012 at 4:54 pm

Bottom line: US employment flat-out sucks, and it sucks harder and longer than it has for as long as I’ve been in the workforce (1992).

I’m an MSEE computer guy and I can’t tell you how many very smart colleagues of mine got laid off simply because they were with a dying company — and have been out of work 2 years. Their unemployment ran out long ago, so they are “no longer unemployed.” It is absolutely brutal.

But I look forward to 9 more months of Government Statistics telling me how everything is improving so wonderfully, and the New York Times cheerleading all the way, and dopes like Yglesias saying that this all proves Obama was a genius from the get-go.

Right up til he’s re-elected, of course. Then we’ll have an emergency, and we need to borrow another trillion as a “stimulus.” Dear God, we are well and truly farked. Get a government job, or die.

45 Donald A. Coffin February 1, 2012 at 5:21 pm

Jim, according to the BLS definition of unemployment–which has nothing to do with receiving UI benefits–if your friends are still actively seeking work, then they would be counted as unemployed.

A broader point is that a number of people (myself included) have been discussing the failure of the labor force participation rate to rise in the recovery (such as it is)–except for those over age 55…many of those baby boomers aren’t retiring, because (a) their defined benefit pension plans disappeared and (b) their defined contribution pension benefits–IRAs, etc.–got hammered.

46 libert February 1, 2012 at 5:25 pm

From the Wall Street Journal: “Chicago Fed Blames Baby Boomers for Big Part of Labor Force Drop”. Link:

http://blogs.wsj.com/economics/2012/02/01/chicago-fed-blames-baby-boomers-for-big-part-of-labor-force-drop/

47 Donald A. Coffin February 1, 2012 at 7:02 pm

Oddly, though, their results depend crucially not on declining LFPRs of aging baby boomers r
elative to historical levels, but rather on the rising shame of older Americans in the population.
Note that they project the LFPR of male HS graduates age 55-70 to rise from 48.9% to 54.5%.
Looking at the entire age 55 and over group (male and female, all levels of educational attainment),
we see that their LFPR fell consistently, from about 43% in 1948 to about 29% in 1994. Since then,
it has risen to 40.5%. In the meantime, the LFPR of 16-24 year-olds has declined from 69% (in 1990)
to 55% now. People age 25-54 are in fact not less likely to be in the labor force, with a roughly
constant LFPR over the past 20 years, of a little over 80%.

In fact, their pjojections are for continued severe declines in the LAP of teens, stable LFPRs for
people age 20-55, and *rising* LFPR among older Americans.

Relatiive, therefore, to the pre-mid-1990s trends, therefore, what they are actually projecting is
an *increase* in LFP *except for* teenagers. So I’m not sure their actual findings support
either the WSJ interpretation or their own remarks about what they have found.

48 Donald A. Coffin February 1, 2012 at 7:04 pm

“share”, not “shame”

49 D. F. Linton February 1, 2012 at 5:27 pm

Zach,
Read the notes and the link. Nomura adjusted for the demographic-based decline in the potential work-force. The dotted line is not simply the mirror of the employment to population ratio. Hence the note at the bottom of the chart.

50 Zach February 1, 2012 at 6:21 pm

The FT post told me it was adjusted, but did not tell me how. Not saying that it’s identical to employment:population, but that the exact same point could be made with less mysterious data.

51 Question February 1, 2012 at 5:42 pm

Why does anyone ever blame any current president for labor problems when any such condition, positive or negative, is result of previous generations of populations and politicians and other world conditions? Why do people invest the presidents with the culpability of shamans who may have displeased some econogods? What control does one person in 4 or 8 years have over this stuff compared to the last 50, 80, 100 years of government policies, national demographic trends and historical events on the planet?

52 To February 1, 2012 at 8:31 pm

Because this is a right-wing blog, and they hate Obama.

53 CBBB February 1, 2012 at 9:43 pm

Yep, this blog is jam packed with Republican partisan hacks

54 Andrew' February 2, 2012 at 8:37 am

And Democrat ones too.

55 CBBB February 2, 2012 at 10:59 am

I hope you’re not talking about me because I think the Democrats are full of shit. Unfortunately people around here are such partisan hacks that they can’t compute the fact that both parties are shit.

56 Andrew' February 2, 2012 at 8:38 am

Simple thought experiment. If/when the economy recovers will the sitting president make mention of that?

57 Andrew' February 2, 2012 at 6:54 am

It depends. One reason is to judge whether that president is maintaining or changing things you deem to be the same problems from the past.

58 MP February 2, 2012 at 8:57 am

Why do people do it in general? Because the world is full of partisan hacks, left and right, who like to attribute anything good to their guy and anything bad to the other guy.

Why do they do it on this blog? I’m not sure they do, certianly not in this post. (Unless you’re referring to the comments, in which case, see above.)

Mankiw had a good post on this topic a while back. He said it’s almost impossible to evaluate policy based on macroeconomic results, because you don’t have a solid counterfactual. Things are bad? They could have been worse? Things improved? Not as much as they would have with the policy I advocated. And that’s without even getting into the limited power of the president in setting policy and most policy in affecting outcomes.

59 Peter February 1, 2012 at 6:23 pm

Maybe I’m just being too eager looking for a good spin on the news, but on account of a couple trends I suspect that the labor force dropouts consist of relatively more early retirees and relatively fewer discouraged workers than might be expected. What are these trends?
1) Given past birth rates, there’s a large bulge of people in their late 50’s and early 60’s who are at the age when retirement becomes feasible. Many of them entered the labor force at a time when defined-benefit pensions were still commonplace.
2) Now that it’s mostly done online, applying for work is easier than it’s ever been. Gone are the days of traipsing around from business to business filling out paper applications. It’s also rare to have to scour paper want ads and mail out resumes. Applying for jobs online is so quick and easy that even the most discouraged people will still keep trying.

60 Donald A. Coffin February 1, 2012 at 7:06 pm

Again, LFP of older workers is rising, not falling. So, relative to the recent past, older workers
are postponing retirment, not retiring early.

61 NAME REDACTED February 1, 2012 at 7:39 pm

Correct. This unemployment has almost entirely been born by the young, and primarily young males.

62 Willitts February 1, 2012 at 9:09 pm

Moaning about the shortcomings of the unemployment rate is pointless and self defeating. When analyzing the economy, you must look at several measures and see what dynamics are changing.

The employment to population ratio is a good measure, but it misses the fact that economic incentives have changed drastically. The incentives for retirement, schooling, crime, military service, being a stay at home parent, starting a business, leaving the country, working in the underground economy, and whether to seek work have all changed. Demographic changes and expectations are interacting with the various incentives. Wages and compensation have changed within sectors and through time with sectoral shifts in employment.

No one measure is going to give you a complete picture, but all the data is telling the same story: a sluggish recovery with persistent labor market distress. Let politicians quibble about ratios. The recovery is a long road and people are asking, “Are we there yet, are we there yet?”

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