Thursday, October 14, 2004

Three Economists, Krugman, and a Comment

A comment on my last post suggests that a search of Brad DeLong's archives is relevant to a discussion of alternative measures of the unemployment rate. The comment may be referring to this post. Brad discusses the measure of the unemployment rate that includes discouraged workers (U-4) in a response to a part of CEA Chairman Greg Mankiw's editorial in the New York Times on August 22, 2004.

In the New York Times editorial (as quoted in Brad's post), Greg writes:

The [u]nemployment [rate] has fallen, [pessimists] say, only because the economy is so bad that people have become discouraged and given up looking for work. But that also does not square with the facts. The Bureau of Labor Statistics has a little-publicized alternative measure of unemployment, called the U-4, which includes those discouraged workers. And what does it show?... [I]t peaked in June 2003 at 6.6 percent and has since fallen to 5.9 percent....
In his post, Brad writes:
Here we need to do a little data analysis. The seasonally-adjusted U-4 unemployment rate started 2001 at 4.4%, rose to 6.0% by the end of 2001, continued a slow rise to 6.6% by June of 2003, fell back to 6.0% by the end of 2003, and since then has stuck at 5.9%-6.0%.

And in my post, I presented all 4 of the measures of the unemployment rate as of this month's employment report for September. U-4 is now down to 5.7 percent. The other three are down by comparable amounts in percentage points.

Neither Greg nor Brad nor I disagree with the simple fact that the unemployment rate adjusted to include discouraged workers has fallen from its peak last June. That dubious honor belongs to Paul Krugman, who wrote:
Mr. Bush will boast about the decline in the unemployment rate from its June 2003 peak. But the employed fraction of the population didn't rise at all; unemployment declined only because some of those without jobs stopped actively looking for work, and therefore dropped out of the unemployment statistics. [emphasis added]

It is not clear to me whether the commenter understands this distinction, but I hope it is clear now. Krugman's statement is false. The presence of nearby statements that happen to be true does nothing to make this particular one true. Krugman should know better, and the New York Times should have a mechanism in place to ensure the integrity of what appears on its editorial page.

Brad's post goes on to discuss the disconnect between the reading of the labor market one would get from looking at the unemployment rate and the reading one would get from looking at the growth of payroll jobs. This is a puzzle that economists, by our own admission (mine and Brad's, at least), have not yet figured out.

3 comments:

Anonymous said...

I am referring to this post:

http://www.j-bradford-delong.net/movable_type/2003_archives/002989.html

Nothing Krugman has said is false. If I give up looking for work to go back to school because the labor market sucks then I am not counted as discouraged, marginally attached, or part-time due to economic reasons and yet I have most assuredly "stopped actively looking for work and therefore dropped out of the unemployment statistics." Only a decline in the employment/population ratio will reveal my choice.

brad said...

RE: "Mr. Bush will boast about the decline in the unemployment rate from its June 2003 peak. But the employed fraction of the population didn't rise at all; unemployment declined only because some of those without jobs stopped actively looking for work, and therefore dropped out of the unemployment statistics."

I'd be inclined to cut Paul rather more slack than you are, but you are right that what is going on her is more complicated: a bunch of people go from employed straight to out-of-the-labor-force, a bunch go from unemployed to employed, a bunch go from employed to unemployed, a bunch join the labor force and get jobs, et cetera. It would be much better to say "the difference is not that a greater proportion of the adult population is employed, but rather that a smaller share of those without jobs are saying that they are 'unemployed' and a bigger share are saying they are 'not in the labor force.'

it is amazing--for the unemployment rate to fall over a little more than a year by nearly a full percentage point, from 6.3% to 5.4% while the employment-to-adult population ratio remains stuck at 62.3%. The only way I can look at this as a good thing would be if I believed that a lot of people in June 2003 still had very unrealistic expectations about what a full-employment labor market would look like, and now they have figured out what's going on--and have stopped looking for jobs that would have disappointed them if they had landed them.

It would be nice (and would make me happy) to find some evidence that this decline in labor force participation is an equilibrium phenomenon. But I fear it's more likely a sign that we may be catching a small case of some European labor market disease...

Online Wong PoKér Hu said...

Let's face it. The Bush administration has already ignore the economy. I may have used a strong term in ignored, but this is just a wake up call. The influx of foriegn workers and outsourcing has even made things worst. In reality, the joke that was Bush is taking his toll.