Thursday, March 12, 2015

Matias Vernengo — How bad is unemployment?

It is worth remembering that the rate of unemployment depends on the participation rate that, as can be seen below, has been falling since the late 1990s. The question is how would the unemployment rate look like if the participation rate remained at the same level it reached at the end of the Clinton boom. 
This calculation was done before (here and here), and the new graph is below showing that unemployment would be at a much higher rate.
Some economists view all unemployment as voluntary in the sense that workers prefer leisure to reducing their market offers to reflect employer bids. But most economists treat those who are no longer actively looking for work (not participating) as voluntarily unemployed so they are not considered in the employment rate. Some would argue that this, too, is unrealistic. when there are too few job relative to job seekers, some seekers will stop looking until the job market improves.
In fact, the rate of unemployment (u*) would be double the current rate of unemployment (u) if the participation rate remained at 67% of the labor force. That might explain why real wages have not increased much in this recovery. The recovery is even weaker than it looks.
Naked Keynesianism
How bad is unemployment?
Matias Vernengo | Associate Professor of Economics, Bucknell University

3 comments:

NeilW said...

Here in the UK the participation rate hasn't changed much at all, but there are two measures of lack of work: 'ILO Unemployed' and 'inactive - wants a job'.

And then we have 'temporary - wants full time'.

Economists like to use percentages so they can condemn millions and millions of real people to the scrap heap - purely in defence of their own misguided beliefs.

If there is one person without work that wants it at the living wage then unemployment is too high and there are insufficient jobs on offer. It is as simple as that.

One of the primary tasks of any economy is to ensure that in individual can contribute as best they can and be paid for it.

Matt Franko said...

"If there is one person without work that wants it at the living wage then unemployment is too high"

righteous Neil!!!

peterc said...

"Some economists view all unemployment as voluntary in the sense that workers prefer leisure to reducing their market offers to reflect employer bids."

The wisdom of the Chicago school and followers ...

It is not merely the mainstream fiction that demand adjusts automatically to full-employment output (absent rigidities and allowing some time to elapse) but that full employment adjusts automatically and instantaneously to actual employment. ;-)