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The "Real" Unemployment Rate

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7/9/2015 9:23:05 PM
Posted: 2 years ago
I made this post earlier today in the polls section (and a similar one yesterday in response to Lannan):

"No, [the U3] isn't misleading, nor is actual unemployment 10 percent...While there is something research suggesting that the U3 rate understates the amount of labor slack (for instance, it fell 20 basis points last month, but the LFPR fell 30 basis points), such as Blanchflower and Posen (2014) [http://www.Iie.Com...] and Blanchflower and Levin (2015) [http://www.Dartmouth.Edu...]. It's true that the U3 doesn't account for marginally attached and involuntarily part-time employed workers, but there are caveats. First, some of the decline in the LFPR -- i.E., people who have left the labor force -- is a result of either aging of the population, increasing returns to education, hysteresis, earlier retirement, etc. Estimates of the extent to which that fall is cyclical range from 1/4 (Aaronson et al (2014):] to 1/2 (Aaronson and Hu (2014):] to 1/3 [Cooper and Luengo-Prado (2014):]. Not to mention, there's even research suggesting that involuntary part-time employment is here to stay (Valletta and van der list (2015)).

But Bench is also wrong: this isn't remotely political in nature. When the labor force falls, the U3 also falls. Why? Because the numerator (total unemployed) and the denominator (labor force) both by the same unit, but because the labor force is larger than the total number of unemployed, the percentage change to the numerator trumps the percentage change in the denominator, meaning the fraction itself falls. That accelerated in 2008, but note that (a) it had already been falling since the early 2000s and (b) baby boomers turned 62 in 2008. There are a number of structural factors at play, so we can't whitewash marginally attached/involuntarily part-time workers. That's ejecting politics into economics to support a political agenda, and it's fundamentally dishonest and stupid.

One more point: we don't know what the natural rate of the U6 is. U3 reductions have moderated a bit. It was falling at about 0.8 percentage points a year for a while, but has only fallen about 0.1 percentage points every two months recently. The U3, however, is still falling rapidly, and is down to about 10.5 percent. However, it was 10 percent in the 1990s, so it's clearly nearing "normal" levels, and the LFPR has leveled out, anyway, with BLS estimates suggesting a longer-run trend of 61.6 percent [http://www.Bls.Gov...].

So, please, cut the nonsense. These issues are much too complex to whitewash

I think this pretty much sums it up: there probably is *some* latent slack in the U3, but it's wrong to assume that the U6 is necessarily a superior, or even a more accurate, measure. We don't currently know how much labor-market slack there is or even what the so-called natural rate of unemployment is, though we have reason to think that it might be close to, if not below, 5 percent.

DDO's Economics Messiah