Are Things Improving?

Sometimes Brad DeLong posts so many things that individual posts get lost.

I hope this one is not overlooked:

Aside on Labor Utilization: From the March 17, 2011 IAS 107 Lecture, by Brad DeLong: The current seasonally adjusted unemployment rate in the United States is 8.9%. However, not 8.9% but 9.5% of those interviewed by the Bureau of Labor Statistics in the second week of February who were either at work or actively looking for work said that they were looking for work and had no job. But the Bureau of Labor Statistics calculates that for the March unemployment release, unemployment is 0.6 percentage points higher than in an average month because February is a slack month. Businesses are still recovering from the Christmas rush, construction in the northeast and the Midwest is still at a seasonal low, and so forth. [Note: i.e. seasonal adjustment.]

The fact that the unemployment rate kissed 10% at the end of 2009 and since then has declined back down to 8.9% seems like good news. … But the unemployment rate has not fallen because the share of American adults with jobs has increased. The share of American adults with jobs today at 58.4% is actually less than the 58.5% of Americans who had jobs when the unemployment rate kissed 10%.

What is happening? If no greater fraction of people are working, why is it that the unemployment rate has been going down? Unemployment rate has been going down because people have been dropping out of the labor force. …

This does not mean that they are doing nothing at all: they are, for the most part, not spending all day watching reality TV auction shows or playing World of Warcraft 24/7.

Most of them are occupied, but occupied doing things that they value less than having a job and earning the money. If you think, as I do, that the employment population ratio is probably a better guide to the health of the labor market and to the extent at which the American economy is working up to its economic potential, we have not seen any improvement in the labor market over the past 15 odd months. The labor market is still as bad as it was back then.

This is quite distressing to me along three dimensions: as a citizen of the world–because the world labor market is in much the same state–as a citizen of the United States of America, and also as a neoclassical economist. Let me talk about this last. We neoclassical economists really do believe that markets are extraordinarily flexible, powerful, and adaptive social institutions. We believe that they recover from shocks. We believe that if something goes wrong with the market system and it finds itself out of equilibrium with substantial excess demands or excess supplies, that it will right itself and crawl its way back to supply-demand equilibrium quickly.

It might not fix itself as quickly as we would wish. We might well want to have the helping hand of the government pushing it back to equilibrium. But the idea is that a period of high unemployment with lots of people who want jobs and could do jobs and do not have jobs not fixing itself–that a period of fifteen months after the downturn ends with no sign of any return toward equilibrium in the labor market–that is very distressing for us neoclassical economists. That calls for some rethinking of our visualization of the Cosmic All…

The latest employment report released last Friday (after the above was written) shows labor force utilization increasing slightly to 58.5 percent, but that is not much of an improvement. There are still a substantial number of people who have dropped out of the labor force. As things return to normal, people who have dropped out will begin searching again, and hopefully get jobs. However, we don’t know exactly how many people will return as conditions improve, and it’s likely that many people will never return. And those that do return, eventually, can see a substantial deterioration in their skills (or how they are valued), or be underemployed relative to the skills that they have.

Some people make growth the top priority in decisions about how to respond to an economic downturn. In this regard, they worry about the deficit and the confidence fairy somehow reducing economic growth. But while the evidence for the confidence fairy view is tentative at best (I’m being kind), the evidence that long periods of high unemployment cause permanent damage to the labor force — permanent drop-outs, etc. — which in turn reduces our actual and potential growth is much more solid. But this does not get the same amount of attention from policymakers, and perhaps this tells us something about whose interests command the most attention when policy decisions are made.

Keeping people connected to the labor force in some way is valuable, and we are not doing anywhere near enough in this regard. I think decency is all it takes to justify doing something for the unemployed. We have an obligation to help people who are unemployed through no fault of their own, want to work, but cannot find employment. But for those where such decency is lacking, or who think that decency is too costly in terms of long-run economic growth, it’s important to realize that turning our backs on the people unlucky enough to be working in the wrong industry at the wrong time, the unlucky people who cannot find new employment and now find themselves struggling to get by, is also costly in terms of economic growth. Even if growth is all you care about, leaving the unemployed to fend for themselves is not the optimal policy.

Originally published at Economist’s View and reproduced here with permission.