esoltas | The standard unemployment rate is a deeply flawed measurement of
macroeconomic conditions. It is so flawed that a decline in the
unemployment rate as we measure it is not necessarily good news, nor is
an increase in the unemployment rate surely bad news. Movements in the
unemployment rate are -- or perhaps have become -- ambiguous signals of
economic improvement or worsening.
What's wrong with the unemployment rate? The problem comes down to
definitions. We know that the unemployment rate is the fraction of
unemployed workers in the labor force. To be counted as "unemployed" by
the surveyors of the Bureau of Labor Statistics, you must "have actively
looked for work in the past 4 weeks," and to be in the labor force, you
must either match that definition of unemployment or have a job.
Normally these definitions work well. A stay-at-home mother or father
who is not looking for work, for a simple instance, should not be
counted as "unemployed" in a way which is relevant for public policy.
The Bureau of Labor Statistics' definitions of unemployment and labor
force participation, however, become deeply problematic when economic
conditions are so poor that they mischaracterize unemployed workers as
having left the labor force, or people who should have joined the labor
force as non-participants.
This is breaking the unemployment rate today. As I've pointed out in prior posts on
this blog, the labor force stopped growing in 2008. That is largely the
result of unemployed workers giving up and dropping out of the labor
force, as well as would-be entrants to the labor force not doing so.
Only a small fraction of this can be explained by changes in population
or workforce, such as the retirement of the Baby Boom generation. These
individuals who are not being counted as members of the labor force are,
in every sense which is meaningful for public policy, unemployed. They
number roughly 5.6 million as of July 2012.
This is why the numbers are so misleading, and why I think we cannot
keep talking about falling unemployment as good news. We're saying, in
effect, this: Good news, America! Another million workers gave up hope
this morning! Don't you feel better about the labor market now!
