Saturday, September 6, 2008

Lies, Damned Lies, and the Unemployment Rate

The unexpected jump in the unemployment rate to 6.1% was obviously big news. But what is the real unemployment rate?

The devil is in the details, or in the case, the definition of "unemployed". And that definition has changed over time, usually for convenient political reasons, with the result that anyone with a historical memory who might compare today's 6.1% rate to historical recessions (such as 1980-81) and find some small comfort that the current unemployment picture still is better by comparison with past recessions would unknowingly be fooling themselves.

Better measures of unemployment are available, and they don't paint a comforting picture. The broadest measure of unemployment -- U6 -- now stands at 10.7%, having increased sharply from 9.2% in April of this year.

Both the level and rate of increase in real unemployment must be troubling for the McCain campaign, but to judge from the Republican Convention -- which largely ignored economic issues -- they intend to take a "hear no evil / see no evil" approach. Republicans' continued insistence that the economy is fine, based on GDP growth rather the economy as experienced as real people (unemployment, wage growth, etc), only exacerbates the perception that McCain & Co just don't get it. They appear determined to march with Phil Gramm into political oblivion this Fall.

Links:
Kevin Phillips on the history of changes to the unemployment rate:
http://www.mindfully.org/Reform/2008/Pollyanna-Creep-Economy1may08.htm

Brad DeLong's post on U6:
http://delong.typepad.com/sdj/2008/09/u6.html

Official unemployment data from BLS:
http://www.bls.gov/webapps/legacy/cpsatab12.htm

4 comments:

Confusion? said...

Let me preface this by saying I'm not an economist. Would you further explain the "real" unemployment rate. I've heard of this distortion before but I don't fully understand it. -seems to be like how the Fed reports inflation

This is off the topic of the current post...as an average citizen I can take a look at our budget and see the 800lb gorilla. When will we be "safe from evil" long enough to address defense spending or any cuts for that matter? My understanding of both tax plans is that Obama will increase the debt by 3 trillion and McCain 4 trillion over the next 10 years. I just don’t see how either candidates plan is fiscally responsible unless we cut spending.

lerxst said...

Unemployment can be measured in different ways. Economists typically rely on the headline measure which measures the fraction of the labor force that is unemployed, where the labor force includes those that are employed and those that wish to be employed (i.e. are actively looking for work).

If you want a measure of economic hardship one might want to include those that are too discouraged to even bother looking or are working part-time but prefer to work full-time.

Personally, I would not see this as a conspiracy but rather as an issue of interpretation --it depends on what you are trying to measure.

As for spending, I think the McCain plan is far more egregious. Yes Obama's plan won't get us to balance in 4 years but it is not intellectually dishonest like McCains-- which despite simple arithmetic claims it will get us into balance.

Personally, I think fiscal balance is not critical as long as we are balanced in the long run. It makes sense to run deficits now when we are entering recession as long as its not too high a share of GDP (its lower now than it was in 1992 as a share of GDP).

You might also want to look at Don Pedro's post which shows Joel Slemrod's slides comparing GOP control with Dem control as an indicator of what we might expect.

Bang said...

How can figures whose comparisons are suspect be any worse than figures for which there is no historical comparison. This feels like every comment I've gotten at a conference session - not very constructive, but since the outcome doesn't agree with the bent of the discussant, there must be something to bicker about in the data collection.

progredi! said...

As lerxst wrote, it depends on what you are attempting to measure, and U6 is a better measure of economic hardship as experienced by ordinary workers. The comparison to how inflation is discussed is apt, as it became almost farcical this year to discuss "core inflation" (inflation excluding volatile food and energy prices), when everyone consumes food and energy and therefore feel the effects of higher food and energy prices.

While some of the general media discuss both inflation rates and the differences between them, a similar explanation and discussion rarely occurs with different measures of unemployment.