With few exceptions (here´s one), there was not much to commemorate in yesterday´s employment report.
Yes, the unemployment rate dropped from 9% in October to 8.6% in November, but that could be mostly reflecting the reduction in the labor force. In the limit, just as dictators or populist presidents take on the task of “rewriting history” (Argentina just embarked on such a project under Cristina Kitchener) or “redefining Inflation” (Argentina guilty again), nothing stops one from “redefining” the labor force as comprising only those in fact employed, few as they might be, “automatically” bringing the unemployment rate to zero!
One problem is that everyone likes to talk in terms of rates, be it growth, inflation or unemployment, but LEVELS are terribly important. With that in mind, I´ll examine the unemployment/employment situation illustrating with a set of figures.
The first shows that when the crisis hit in mid 2008, the unemployment rate rose quickly. That happened because the labor force was still on the rise. Note that unemployment stops rising and then “gently” falls when the labor force does the same.
Why is the labor force contracting? Although population is rising, the rate of participation in the labor force is falling as observed in the next picture. All the news about the long term unemployed induces people to leave the labor force. Going back to school, or staying on in school for higher degrees is a “favorite”.
But isn´t employment rising? Yes it is, with the number of non farm employment (NFP) going up by 2.3 million over the last two years. That explains why the employment-population ratio has stopped falling over the same period. As mentioned, population is growing and the growth in employment has just been sufficient to keep the employment-population ratio stable. Note in the next picture that it is not that the employment situation is getting “better” as frequently mentioned by those that only think in terms of rates of change, only that it stopped “getting worse”, as when the ratio dropped over “Niagara Falls” in mid 2008.
Are we experiencing a “jobless recovery”? Not really, because the economy is not experiencing anything that could be called “recovery”, again despite what the “growth rates” watchers say! By “recovery” is meant that if you drop from the 100 level to the 80 level that you are climbing back to the original level. But that´s just not happening. You are “content” in remaining at the new lower level.
That can be easily understood from the next set of pictures (which “define” the “hole theory of employment”).
The top figure shows that nominal spending (NGDP) was evolving along path A, dropping suddenly and quickly down to path B. A “hole” was thus created. Along path B NGDP is growing close to what it was in path A but at a much lower LEVEL, so it´s not RECOVERING. It would be strange if employment showed a different behavior. The bottom part of the indicates that it is evolving accordingly.
The administration can go “blue on the face” from weaving “jobs plans”. Any success will be local and minimum. What needs to happen, once again, is for the Fed to TARGET a higher level of spending and “shoot for it”.
What is NFP?
Non Farm Payroll (i.e. Employment)
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Good post. You’ve seen my version of your “hole” (a “pitchfork” as you rightly label it). The advantage of your approach is that it keeps the attention on where it matters: levels of employment and levels of AD. Indeed with your approach I can almost “see” the Euler equations, with constant pre- and post-crisis equilibrium growth rates but no care for equilibrium levels.
I prefer my approach to explain why high unemployment rates and positive growth rates are not a paradox; unemployment tracks the output gap so that if U is high, the gap is negative and vice-versa. The growth we’re experiencing is not sufficient to close the output gap; hence it is not sufficient to close the “unemployment gap”.
The growth being experienced is just sufficient to keep the E/P ratio “stable”. Thge depth of the hole determines in part the size of u, which is further affected by changes in the labor force and such.
It is important that folk keep banging away about the cyclical pattern as you do so well here. The tendency for people to make quite unsustained structural comments or inferences about unemployment effects which are patently cyclical is both sad and very counter-productive.
Lorenzo. Often the “problem is structural argument”, as in Kocherlakota, for example, is just “code” for MP is impotent.
The employment-population ratio is the key chart, in this excellent blog-post.
If you walk down the USA street, one in 20 people you pass used to work, but is not now. They are consuming, but not producing.
This is abject failure.
BTW, the latest post by Mark Perry, Carpe Diem, shows declining inflation. We are fighting inflation into the economic grave–its, and ours.
This hits the nail on the head. The NGDP gap looks just like the E\P ratio: not getting worse but no progress on closing the ‘gap’/slack in two years time.
Best charts ever!
I happened to catch Diane Sawyer trumpeting the glad news Friday night. She beamed as, one by one, job seekers who had found jobs leaned into the camera and exclaimed, “I got a job!!”
“I got a job!”
“I got a job!!!!!!!”
The footage looked like it had been shot by cell phone; the whole segment called to mind those low-cost commercials for no-name weight-loss products on cable television — I LOST FIFTEEN POUNDS IN TIME FOR CHRISTMAS!!!!!!
After the exultations were over, Diane interviewed a “financial advisor.”
The financial advisor said that, yes, the jobs report was good news, but then cautioned that the economy is “like an ocean liner.” It takes a long time to turn an ocean liner around, she said, and it’s going to take a long time to turn the economy around. Also, she continued, there are icebergs ahead. Iceberg(s), plural. We could hit an iceberg. Whether we do or don’t hit an iceberg is pretty much up to God. (She didn’t say God.) So, yes, she concluded, all in all, good news on jobs but the economy is an ocean liner and there are icebergs.
I say No more metaphors about the economy.
OK, the economy might be like an ocean liner — but then what about all those V-shaped recoveries where the economy wasn’t like an ocean liner? If we’re going to call the economy an ocean liner, if we’re going to give (and take) financial advice based in the premise that the economy is exactly like an ocean liner, let’s at least develop the metaphor to the point where we know when the economy is like a **speedboat** and why it **isn’t** like a speedboat this time around.
And icebergs — !?
What on earth?
When’s the last time you heard of an ocean liner hitting an iceberg? For me it’s never. The Titanic sank in 1912; that’s the last ocean liner I’ve heard of hitting an iceberg, although, admittedly, I am not current in these matters. Nevertheless, as far as I can tell, nobody has any business hitting an iceberg; that’s what navigation and steering systems are for. If the economy **is** like an ocean liner, then we should definitely **not** be hitting any icebergs now or ever.
Now I feel worse.
Catherine. Thanks a lot for making me laugh!
Oh! The comment was great.