Saturday, May 09, 2009
The unemployment rate is simply a fraction. The denominator contains the number of people in the labor force (i.e., those employed + those actively seeking work), and the numerator contains the number of labor force participants not employed (click here for all the details on this calculation). (Self test, what might the leisure- consumption graph we used when discussing individual labor supply look like for an unemployed person? At the wage this person expects to earn, they are willing to sacrifice leisure and gain consumption, but they currently are not working.)
Currently, the unemployment rate for the US is 8.9%. This is the highest it has been during your lifetime and is approaching the highest in the post-war period (for some males it has already reached these levels ). The unemployment rate is substantially higher here in Oregon. The last reported number was 12.1% (for March).
As dismal as these numbers are, there is growing debate about whether or not this is the measure of labor market health policymakers should care about. There are two groups of people that the standard measure of unemployment doesn't capture adequately. First, there are marginally attached or discouraged workers. These are workers who are actually willing to work at the wages offered, but who have given up trying to find work. As such, they are not in the labor force (and thus excluded from the standard measure). Second, some people are involuntary part-time workers. That is, they would like to work full time, but can only find part time work. (Note -- in both of these cases, individuals are not reaching the simple utility maximizing point derived from the simple labor supply model we discussed. Again, self test yourself on what the graphs for these individuals might look like. Are they reaching their ultility maximizing points? If not, why should we care?)
The data to account for these different groups are available (and are reported with increasing frequency). Including marginally attached workers in the denominator and excluding the involuntarily part-time from the numerator, the unemployment rate nearly doubles to 15.8% nationwide. As this discussion illustrates, the involuntarily part-time account for most of the difference (here's another discussion of this issue).
I feel that the unemployment rate isn't helpful by itself, because it seems like you could manipulate the numbers to achieve any percentage you wanted, (i.e. Throwing in or taking out different categories of workers from the numerator or denominator). However, regardless of what method is used, the unemployment rate is helpful in comparisons over time (i.e. it's higher this period than last).
Here is a question, so 12% of Oregonians are unemployed, and probably in debt, next month a whole slough of college students will graduate with a large amount of debt. Is all that debt on interest rates that are tied to inflation, and if not is it possible for those now unemployed-in-debt people to do anything that could affect inflation (i.e. act in a way that creates hyperinflation so-as to make their student debt more or less disappear?)
I think the unemployment rate is helpful. It may not be the correct representation of the labor market at a point of time. But, it is, definitely, a great tool to measure the turbulence in the market.
This is another side to this matter, however. It seems by not including involuntary part-time workers economists are protecting the unemployment rate. In other words, they are not letting appear as bad as it may actually be. I mean 8.9% is bad, but it certainly doesn't have the shock and awe vale of 15.8%.
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