Many of us think this diagram shows there has been some kind of structural break in the labor market, and/or that recovery is proceeding slowly. Paul Krugman, very recently, suggests that structural factors play little role because the measured unemployment rate is now below five percent.
But in fact labor market indicators are quite mixed, and furthermore the best and latest research out of MIT indicates the structural story does indeed carry real weight. See also Alan Krueger’s work, or recent research from the AER. And there are plenty of markers of a more persistent shift in economic activity, as reflected in CBO markdowns of expected productivity growth, based partly on trends which preceded the recession. That all might be wrong, but the mere citation of the current 4.9 unemployment rate doesn’t persuade me otherwise.
Let’s not forget what Krugman wrote in 2012:
My current favorite gauge of the jobs picture is the employment-population ratio for prime-age adults (25-54). EP ratio instead of unemployment rate, because U may be distorted by workers dropping out…Everything else is just noise.
At least as of yesterday, the preferred labor market indicator was once again the unemployment rate, no mention of 2012. That was then, this is now, I suppose.
The rest of Krugman’s history on recovery is curious. Very early on he predicted a rapid recovery (if not right away), then he predicted for several years a long-standing secular stagnation, now he seems to be citing “a recovery of demand.” I don’t see anything wrong with such a change in emphasis, as the facts change, and Krugman himself makes this meta-point fairly frequently. Still it is odd for him to be criticizing the predictive record of others on these issues. He’s been through what appears to be three distinct positions on recovery, and two distinct positions on which labor market indicators really matter, and we are still not sure exactly which views are correct.
Bryan Caplan is pleased that he has won his bet with me, about whether unemployment will fall under five percent. I readily admit a mistake in stressing unemployment figures at the expense of other labor market indicators; in essence I didn’t listen enough to the Krugman of 2012. This shows there were features of the problem I did not understand and indeed still do not understand. I am surprised that we have such an unusual mix of recovery in some labor market variables but not others. The Benthamite side of me will pay Bryan gladly, as I don’t think I’ve ever had a ten dollar expenditure of mine produce such a boost in the utility of another person.
That said, I think this episode is a good example of what is wrong with betting on ideas. Betting tends to lock people into positions, gets them rooting for one outcome over another, it makes the denouement of the bet about the relative status of the people in question, and it produces a celebratory mindset in the victor. That lowers the quality of dialogue and also introspection, just as political campaigns lower the quality of various ideas — too much emphasis on the candidates and the competition. Bryan, in his post, reaffirms his core intuition that labor markets usually return to normal pretty quickly, at least in the United States. But if you scrutinize the above diagram, as well as the lackluster wage data, that is exactly the premise he should be questioning.
As I’m the only one in this exchange fessing up to what I got wrong, and what I still don’t understand, and what the complexities are, in a funny way…I feel I’m the one who won the bet.
Addendum: Here is the graph of the ratio for prime age workers only, it too shows partial but by no means complete recovery. And note this: the more optimistic you are about interpreting the labor market side, the more pessimistic you ought to be about the productivity picture, a conclusion which is anathema to Caplan at least. Given recent configurations of data, it really is hard to avoid carving out room for structural factors as a significant part of the story.