Unemployment and Payroll Growth: Maybe the Stimulus Worked

So the Administration is taking a lot of flack for this graph

and the fact that unemployment is already at 9.5%. The common explanation is that the administration misread the economy.

A simpler one, however, is that given the economy unemployment is just unexpectedly high

Here is a scatter plot of unemployment since 1948, when data was first collected, and year over year job growth.

The economy has shed 4.1% of its jobs over the last year. Thus by a very rough estimate unemployment should be just about 8%, which is exactly what the administration predicted.

Now, I used a second order polynomial for my trend line to account for that flattening out in the bottom right of the graph.  Unemployment can’t go but so low even in a scorching economy because it takes some amount of time for people who relocate or quit to find new jobs. During the search period they are unemployed.

However, I know polys make some people suspicious so here is the linear trend.

It actually predicts lower unemployment, in large part because that flat section is flattening out the trend line.

Here, is another thing two. The red dots that represent the current recession are in chronological order from bottom to top because unemployment has risen throughout this entire recession.

The slope of this recession is much steeper than the slope of the basic relationship. This implies that given the very low levels of unemployment we started with, these high levels are quite surprising, even though we’ve had very bad payroll growth.

All of this is of course extremely rough but it seems to me the most parsimonious explanation for high unemployment is that more people are in the job market than we would predict. That is, unemployment is unexpectedly high given the level of job losses because not as many people are dropping out of the workforce as we would expect.

Maybe they can’t drop out because their retirement savings was lost when their house and 401K collapsed in value.