Unemployment Can Be a Good Thing
People don't always stay out of the labor force because they have no choice — but statistics don't take this into account.
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One thing that rather seems to annoy a certain type is that by the standards of the last few decades the unemployment rate has been really low in the US during the Bush Administration. This despite the “weak economy” and the appallingness of having a Republican in the White House. Clearly, this could not be allowed to stand as it is and thus something other with which to browbeat everybody must be found. Like, for example, the employment to population ratio.
A little explanation just to set the scene: the unemployment rate, which has been either side of 5% for some time now is not in fact the number of all those without work. It’s the number of all of those who would like to work but who are not doing so (yes, there are further details but they’re not important to us here). We say that those who are currently working plus those actively looking for work are the labor force: when we measure unemployment that 5% or so rate is that, of 150 million people in the labor force, 7.5 million of them can’t in fact find work. But the population in the US is 300 million people: where are all the rest accounted for? (Please note that I’ve rounded all of the numbers in this, simply for convenience sake. They’re accurate only for the purposes of the argument.)
First, there’s a few more than 4 million births each year so the group of Americans under 16 is around 80 million. So we still have that 70 million to account for: the difference between the adult population and those in the labor force. Who are these people and further, should we actually worry whether they’ve got a job or not? What we do here is we take that number in employment and compare it to the population of the correct age that they could be in the labor force if they were actively looking for work. This is called the employment to population ratio.
Well, clearly, some people do worry about it. Paul Krugman, The Big Picture, Angry Bear, Jeff Frankels — there’s some economic heavy hitters among those names, but are they entirely correct to worry so?
The true answer, as with so much in economics, is that it depends. We can construct scenarios whereby it’s a very bad thing indeed for people to drop out of the labor force: people who are so discouraged by the possibility of ever landing a job that they don’t in fact bother to pursue one any more. Or perhaps people rotting on welfare: this was the justification (at least according to my old Professor, Richard Layard, who helped create the reform movement) for the welfare reform of the 90s. Instead of letting people waste their entire lives on welfare checks, get them back into the labor force at least, so that they are trying to get jobs.
But there are other people out there that we’re entirely happy to have outside that labor force. Mothers of young children might decide that they would rather raise them than slop hambugers: and who are we to say they’ve made the “wrong” choice? There’s also the retired to consider. What we really want to do is to sift that population out of the labor force for those who are out by choice (a good thing, it’s liberty and freedom in action) and those who have been pushed out (a bad thing, a negation of that freedom and liberty). Unfortunately, we don’t really have any good way of doing this sifting. Other than going around each individual out of the labor force (or some statistically significant subset of it) that is, and no one has done that as yet. So we try to divine the truth from the information we do have.
And that’s what those links above are to, places where people have looked at the employment to population ratio and declared that the jobs market is in fact worse than the straight unemployment rate would lead us to believe. For those who are economically inactive, the percentage of the adult population that not only doesn’t have a job but isn’t looking for one has risen. And, of course, the assumption is that they’ve been pushed, not chosen, and that this is thus a bad thing.
But perhaps it is in fact a good thing? Perhaps this change in the size of the labor force is a result of individual choices rather than people being pushed?
One oversight, in the numbers used by Professors Frankels and Krugman is that they are using numbers from the Bureau of Labor Studies which show the entire population of 16 years and older. Plus, they’re not accounted for the fact that the population itself is getting older. No, I don’t just mean that each individual is getting a day older, a day at a time, but that the age composition of the population is changing. We’ve got a lot more old people than we did even a decade ago. Not only are the baby boomers beginning to retire but those already retired are living a lot longer than the age cohorts before them did. So of course we would expect to see the employment to population ratio change: do you or anyone else think it a bad idea that those 80 year olds on their Medicare Viagra are not having to work or look for it?
There’s another related point made by William J. Polley. From the Congressional Budget Office, we find that many more 16-19 year olds and those 20-24 are staying in school and education, thus lowering substantially the employment to population ratio at that end of life as well. Something which, given all that talk about the “Knowledge Economy” we might think a good idea.
However, to be scrupulously fair, we also have to point out that the ratio did indeed fall amongst the 24-54 year old group, but markedly less than amongst the total adult population.
My own guess is that the entire effect, this fall in the employment to population ratio, is made up of a series of such desirable points. That there are more older Americans, those really and fully retired, that there are more younger ones staying in school: the fall in the ratio for the middle age group might simply be more women deciding to make homes rather than careers perhaps. One of these problems that, the more one analyzes it, the more one realises that it’s not in fact a problem at all: rather like the gender pay gap. The more you look at that one, taking account of career breaks to have children, of part time working to raise them, of the sectoral choices that women make, of the slight squeamishness many women have about hard negotiating for their pay, the higher level of sick leave, the more it seems there’s no room left for there to be any direct discrimination in the fact that there is indeed a gender pay gap.
Even if I’m wrong about the full explanation being of this benign sort, I’m absolutely certain that a large part of it is.
So next time you see one of those ruminations about how, while we do have a low unemployment rate, what really matters is that we’ve got a low employment to population ratio, just mentally add the following headline to it:
“Kids staying in school, Americans living longer: Bush Blamed.”
Hey, works for me.
Tim Worstall is an Englishman who has failed at many things. Odd bits and pieces of his writing have been known to turn up in the Times, and the book pages of the Daily Telegraph
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19 Comments
Andrew:“Tim Worstall is an Englishman who has failed at many things.” I agree with this statement. I don’t agree with his rosy assessment about unemployment. What about all of the people out there who are underemployed? They are still counted but are not working to their full potential and salary. What about all the blue-collar workers who are accepting pay and benefit cuts because they face the tough decision of working for $10 an hour or being out of work? What about the fact that the price of gas, food, medical expenses and consumer goods are rising much faster than wages which have stagnated over the past decade? While we should be looking for optimistic news about the economy twisting definitions and data to come up with employment to population ratio crap does not help our situation.
May 5, 2008 - 6:06 am ex-democrat:andrew - please provide some support for your (implied but erroneously unstated) assertions that the proportion of “people out there who are underemployed,” and the proportion of “blue-collar workers who are accepting pay and benefit cuts because they face the tough decision of working for $10 an hour or being out of work” has increased over the past 10 years.
May 5, 2008 - 7:04 am Andrew:Otherwise please increase your level of non-responsiveness.
I’m sorry I thought I was a poster not an article writer. I am however a labor economist and can say with some certainty that underemployment has risen significantly in the past 10 years. There has been substantial decline in the American manufacturing industry and a large increase of lower paying service sector jobs which provide little to no benefits. The tremendous increase of temp positions is the clearest example of underemployment. Far more than half of all temp workers would prefer a permanent position and are unhappy with their situation. Nearly one-third of all new jobs added to the US economy are temp positions and nearly all of them provide no benefits and most do not lead to permanent positions. And as a resident of Michigan I know all to well about workers accepting pay cuts to keep their jobs. It seems to happen almost every week in this state.
May 5, 2008 - 7:33 am Don:Andrew: Just want to chime in regarding the “Nearly one-third of all new jobs added to the US economy are temp positions” much of the reason for this is the workers comp fraud that has hurt many small buisness owners such as myself.
May 5, 2008 - 10:33 am redherkey:I’d concur that underemployment has increased. Having an increasingly educated workforce coming online in Eastern Europe, South America, India, China and other markets with full access to telework facilities capable of supporting offshoring will continue to displace U.S. citizens with less than a high school diploma.
In our rural community of 1,000, I can easily think of 20-30 under-employed workers out of the working age population of ~500 to 600. They lack a high school diploma, lack training in any specific trade or craft and find little consistent work. My neighbor has a son-in-law who receives permanent disability and walks with a cane in town, but puts up hay and does other cash-based work for farmers around here (with no impairment). When his beer money runs short, he’s always available. He also sells wood chips for smoking meat for cash with no visibility to sales tax. We have a dozen plus “hired men” types who tend to cattle and do other labor requiring no training. And then there’s the dozen or so junk guys who will pick up old vehicles or other farm metal for the scrap value. Many of these people have small farms or other side businesses they do for cash. The scrap guy over the hill to my west sells farm fresh eggs and delivers to dozens of households. Another west of him has sheep and goats and sells goat milk.
Again, they’re all living outside of the tax system, make a living that exceeds minimum wage due to the lack of a tax liability. A few who really hustle and have their own animals or produce to sell in addition to their labor net $30K annually with little difficulty, which would take a over-the-road truck driver’s gross income if taxes and social security were to be factored for a comparable taxable wage. Of course, they don’t show up in government statistics since they’re mostly invisible (except for those on disability, which are also not accounted for as employed).
Are these people a problem? I’d have to estimate they exceed 5% of the natural workforce. I’m not even including the small percentage of criminals, meth dealers, etc. that are self-employed under the tax radar. While the IRS might be alarmed, many (excluding the criminal element) provide a necessary bottom feeder role and help society with necessary efficiency optimization. If we’re really concerned about the tax issues of these undereducated unsophisticated non-filing self-employed individuals, then we really need to get a flat-tax put into place that ensures compliance at the consumption level.
May 5, 2008 - 11:25 am Akatsukami:But, redherkey, is this underemployment in the sense in which andrew uses the term? What wage would your neighbor’s son-in-law, and the two dozen or so casual laborers and junk men in your town accept (with, of course, being entered into the tax system…and getting Federal and probably state income tax, FICA, and Medicare withheld)?
May 5, 2008 - 2:51 pm ex-democrat:andrew - i sometimes feel like citing myself for support too. doesn’t fly though as i’m not a “labor economist.”
May 5, 2008 - 3:50 pm Tim Worstall:Andrew, well done for moving the discussion so far off subject. I’ve not addressed underemployment as the piece isn’t about that specific point at all. It’s about the labor force to population ratio. Are changes in that driven, as some insist, by people being either pushed or discouraged out of the labor force or is it that the demographics of the population are changing and thus we have more people who are quite voluntarily and quite happily out of the labor force? The retired, for example, or stay at home Moms? Given that we do indeed have an ageing population and that the figures quoted are for the 16-to death age group the latter is at least partially true.
May 6, 2008 - 12:48 am Andrew:Perhaps, as a Labor Economist, one experienced with such figures, you’d like to give us an estimate of how much the change in the ratio is due to such factors? As I do point out, while I think that this might explain all of the change, I don’t insist that it explains all of it: only that it explains some of it. If you want to argue that point then you rather need to provide some numbers, don’t you think? To refute it?
Again I am a poster so I could care less about having to waste my time presenting data thats for the authors to write about. Does unemployment matter? Is it a good thing? Yes that depends. For companies it is a good thing since it ensures readily available workers. For those workers unemployed, not so much. So it depends who you ask. And as for life expectancy well I wouldn’t have ended my article on it since it was just reported that it fell with regards to women.
May 6, 2008 - 8:18 am darelf:http://www.washingtonpost.com/wp-dyn/content/article/2008/04/21/AR2008042102406.html?hpid=topnews
Tim, did you imagine that you would get a living, breathing example of what you complain about in this blog post to show up and prove your point for you?
It must be pretty satisfying.
May 6, 2008 - 8:34 am Tim Worstall:“It must be pretty satisfying.”
Indeed.
May 6, 2008 - 10:56 am John F Not Kerry:Andrew,other than some vague sense of dissatisfaction, why are you so hung up about underemployment? Here in America we are free to pursue our dreams. The limitations we face are largely (but not completely) self-imposed. If you want to work in a field that doesn’t exist in your town or region, nothing, except your own choices (some of which have led you to this point) is keeping you from moving to where that thing exists.
The term itself smacks of a victim mentality. “I’m being underutilized in my job.” “I have a degree.”
Nobody intrinsically deserves a job. It takes effort to prove yourself enough to someone to give you a job and retain that job. America’s economy has suffered under the socialism of unions, where jobs are protected not by competency, but by seniority. I worked for 10 years as a letter carrier, and saw many who could not survive in a competitive work environment. I’m not denigrating the job, but the system. I felt I was what I would call “misemployed” there, but it was not oppressive to me. I knew that I could make a change if I wanted to enough.
I confess I am not a labor economist, but I am an observer of life and people. I have just been hired for a temp job that has potential for permanence. I am thankful for it, having not had a paycheck since August (Remember I mentioned choices? I chose to enter the real estate field in late 2005, and was not very successful.) Will that job utilize all the skills I believe I possess? Probably not. But I’m actually a little bit more concerned with bills and food than with some ephemeral feeling I might have about whatever job I have.
May 6, 2008 - 9:24 pm michaelyi:I’m a labor economist and Andrew is wrong. I can prove it but I won’t. Neener neener.*
*That should sufficiently establish my credentials as Andrew’s peer. Heh heh.
May 7, 2008 - 3:11 pm John F Not Kerry:Heh.
May 7, 2008 - 3:48 pm Rick554:Does anyone care about a white male construction worker not enjoying my “potential”? I didnt think so
May 7, 2008 - 5:54 pm Wacky Hermit:I’m dreadfully “underemployed” as I have 10 years experience as an adjunct professor, and I’m “wasting” all that education on homeschooling my kids. My husband makes sufficient money for our family’s needs, but I guess I’m just free-riding or something, because Andrew thinks I ought to listen to him and get back to work where I belong, because he’s a “labor economist” and he knows oh-so-much more than I do about what’s best for me.
Andrew needs to get a life of his own and quit worrying about how to best maximize everyone else’s “potential”.
May 11, 2008 - 1:38 pm