A number of people seem to think that the recovery from the financial crisis hasn't been "real" and that basically we never really left the financial crisis and official figures are doctored. We get quite a number of these comments at virtually any article we write here, so let us deal with these arguments one by one.
In an article (here), we presented the following graph:
There are numerous people who seem to think this figure (which comes from FRED, the Federal Reserve Bank of St. Louis) is real and argue that the unemployment rate is much higher than the 5% official rate.
For starters, the graph indicates private sector job creation, not unemployment. Secondly, there are reasons for arguing that the 'real' unemployment rate is higher than the official 5% rate but one has to compare like for like.
That is, when comparing unemployment now with that of a previous period, one has to use the same definition. In this case, the official rate is the so called U-3 unemployment rate:
Here is Elisabeth Jacobs:
The labor market is recovering from the deepest economic downturn since the Great Depression. The private sector has added 12.8 million private-sector jobs over 64 straight months of job growth, the longest streak of private-sector job creation on record. The unemployment rate is down to 5.3 percent, a seven-year low.
That streak is considerably prolonged as this article was written half a year ago.
But, many people do not take this face value and argue the real unemployment rate must be higher. Well, there is something in that, but only if one takes a different employment measure.
Popular amongst naysayer's is the U-6 unemployment rate. Let us explain the difference between U-3 and U-6 unemployment. Or better, here is Investopedia:
The U-3 unemployment rate is a comparatively narrow technical measure that leaves out a whole swath of out-of-work people who are willing and able to take a job but who don't fit the narrow BLS definition of "unemployed." For example, a stonemason who wants to work but who has become discouraged by a lack of opportunity in the midst of a deep economic recession would not be included in U-3 unemployment. A marketing executive who is laid off at age 57 and stops scheduling new job interviews due to her experience of age discrimination would not be included in U-3 unemployment. A person who only works one six-hour shift per week because no full-time jobs are available in his area would not be included in U-3 unemployment.
In contrast to the U-3 rate, the U-6 unemployment rate includes all of these cases. Consequently, the U-6 rate is much truer to a natural, non-technical understanding of what it means to be unemployed. By capturing discouraged workers, underemployed workers and other folks who exist on the margins of the labor market, the U-6 rate provides a broad picture of the underutilization of labor in the country. In this sense, the U-6 rate is the true unemployment rate.
Now, on one level it does not really matter all that much, because there has been a big improvement in the U-3 unemployment rate. It's important to use the same kind of measurement over time for consistency.
But we can look at other labor market indicators, and we get a comparable (in fact, slightly faster) improvement:
Yes, the U-6 unemployment rate is considerably higher, but this isn't at all surprising, considering it's a much wider concept of unemployment, so it has always been higher, this isn't something of the last years.
What matters is that it has also come down rather a lot, it's consistent with the improvement in the U-3 unemployment rate, and so are other indicators. For good measure, here are the U-3, U-4, U-5 and U-6 rates, but the picture doesn't really change:
Here are the initial jobless claims:
Or, here are job openings:
Plotting these job openings against the unemployment rate, we get the familiar Beveridge curve:
Here is Market Realist:
In many respects, I believe the jobs market best reflects the strength in the US economy. The US Beveridge Curve maps jobs openings against the unemployment rate to gauge the state of the labor market. With the unemployment rate dropping to 5.1 percent in August, and the Job Openings and Labor Turnover Survey (or JOLTS) improving sharply in July, the US Beveridge Curve is now at its strongest point since the recession, as the red line in the figure below shows.
You also see that, while substantial differences still exist (but that's not new), unemployment has fallen across all education levels:
Another indicator falling steeply is the median duration of unemployment:
Another myth dispelled by the figures is that the recovery is only, or mostly creating part-time jobs:
There are some labor market statistics that cause a degree of concern, and these are the following:
We've been rather exhaustive in providing you all kinds of data which paint a pretty clear and consistent picture of a rapidly improving labor market. However, the odd figures out are these participation rates. Here are some possible explanations:
- Long-term unemployed are discriminated
- There is a demographic effect, retiring baby boomers
- The dislocation from the financial crisis
It is certainly true that long-term unemployed are discriminated against on the labor market, here is Matthew O'Brien:
what Ghayad and Dickens found is that the Beveridge curves look normal across all ages, industries, and education levels, as long as you haven't been out of work for more than six months. But the curves shift up for everybody if you've been unemployed longer than six months. In other words, it doesn't matter whether you're young or old, a blue-collar or white-collar worker, or a high school or college grad; all that matters is how long you've been out of work.
And here is Elisabeth Jacobs again:
The decline in the labor force participation rate predates the Great Recession and is mainly the result of several structural changes in the labor market, including the aging of the workforce. Recent declines in the labor force participation rate that are not explained by long-standing structural changes are largely due to persistent business cycle effects. Five years into the labor market's recovery from the most severe recession in recent history, demand remains slack.
What are these persistent business cycle effects? Well, here is Evans-Pritchard, describing a BIS research paper:
Credit bubbles are corrosive. They gobble up resources on the upswing, diverting workers into low-productivity sectors and building booms. In Spain the construction share of GDP reached 16pc at the height of the "burbuja" in 2007, when teenagers abandoned school en masse to earn instant money erecting ghost towns. Parasitical wastage creeps in. "Financial institutions' high demand for skilled labour may crowd out more productive sectors," said the paper, acidly.
The bubbles leave a long toxic legacy after the bust hits. This takes eight years or so to clear. "The occurrence of a crisis greatly amplifies the impact of previous misallocations," said the paper, racily titled "Labour reallocation and productivity dynamics: financial causes, real consequences".
Crippled economies have to make the switch back to healthier sectors against the headwinds of a credit crunch and a broken financial system, and typically amid austerity cuts in public investment.
When analyzing a phenomena and drawing conclusions, one has to be careful:
- Using the data consistently, that is, taking the same measures to give a consistent picture of their development.
- Taking several measures to get a more fuller picture.
This is what we've done with the US labor market above. By and large, a consistent and substantial improvement in US labor market conditions emerge. Yes, U-6 unemployment is much higher, but it has always been much higher.
Other myths (like the large amounts of part-time jobs created) are simply not present in the data. So we don't see any evidence that the Government is, or has been, doctoring the figures.
There are some data where the improvement is much less pronounced, like labor participation rates, but much of that can be explained by more structural factors like demographics, labor market discrimination, and the ravishing dislocating effects of credit bubbles.
There is another outlier, which is wages. This has been an outlier for over four decades, and warrants a separate treatment, which is what we'll attempt next.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.