Take a look beyond numbers of jobless rate

By James McCusker Herald Columnist

Besides economists themselves, one of the most vexing things about economics is that nothing, absolutely nothing, is simple.

This can sometimes make us pushovers for ideas that defy common sense. Recently, for example, an analyst working for a very large bank proclaimed that the introduction of the iPhone 5 could add half a percentage point to the U.S. gross domestic product.

How importing a telephone made in China is going to have that kind of impact on GDP was never made clear and never really made sense either. All of the design and development costs that are part of the domestic investment in the new phone have already been spent and reflected in the GDP. To have the kind of effect the analyst predicted, the phone would have to transform people’s confidence levels in the manner of some sort of amulet, which is more about magic than reality.

Smartphones aside, there is no doubt that economics can make a simple idea complicated. We all know what it means to be employed or not employed, for example. It’s pretty simple. Most of us don’t know exactly what unemployment means, at least as it is measured in the total economy, though.

In all of applied economics there is probably no concept that is more important, but less understood, than unemployment.

The reason why unemployment is not well understood is that there isn’t one definition that fits all kinds of joblessness. We eagerly await each month’s data from the U.S. Department of Labor, seeking a single number that will tell us whether things are getting better or worse.

Instead of one number, though, we get many, and by the time the analysts and spinners are done with the numbers, sometimes it’s hard to remember whether the news was good or bad.

A Labor Department’s recent report was no exception. Last month, for example, the unemployment rate declined, from 8.3 percent in July to 8.1 percent in August. That sounds good, but it turns out that the number of people actually working went down and at least 368,000 people dropped out of the labor force.

Since the number of unemployed people is obtained by subtracting those with jobs from the total labor force, shrinking the labor force makes it appear that a greater percentage of people have jobs. So the unemployment rate, the “one number” we look to, goes down.

In the Labor Department’s summary of the employment data for August two of the frequently encountered phrases are “little changed” or “essentially unchanged.” If so many people had not dropped out of the labor force, August would have looked very similar to July.

Clearly, though, dropping out of the labor force is not a positive trend in our current economy and it must be bad news. But in economics nothing is that simple.

Volatility turns out to be the key to understanding the dropout number. It turns out that the number of people dropping out of the labor force in August is not as big a deal as it first appears. In fact, there have been four increases and four decreases shown in the monthly data so far this year and August wasn’t the largest of them.

The August employment report was clearly over-interpreted then, which is to be expected in a presidential campaign year. The data really does not support much more of a conclusion than our economic recovery is somewhere between lethargic and stalled, which is why the Federal Reserve is restarting its monetary stimulus program.

Whether the Fed’s efforts will have much effect on jobs though, depends on what kind of unemployment we’ve got. If a lot of it is structural or part of the “normal” or “natural” rate of unemployment, then it will not respond to monetary or the traditional government spending-based stimulus programs.

Many economists believe that the normal rate of unemployment has been rising, and now accounts for the lion’s share of the current jobless rate. The Federal Reserve Board of San Francisco has published an excellent assessment of the economic research done on the subject in their Economic Letter entitled, “What Is the New Normal Unemployment Rate?”

The San Francisco Fed authors note that the normal rate is higher than it had been before the recession and believes that “much of this increase is likely to be temporary.” Maybe so, but even in the best light, it looks like we’re facing a jobs problem that will persist for years after this election.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.

More online

The research paper on the new normal unemployment rate by the Federal Reserve Board of San Francisco can be found at: http://tinyurl.com/FedNNUR

And the update to the report, published days ago, can be found at: http://tinyurl.com/FedNNURupdate