In discussing declining labor force participation Mike Konczal writes

At the other end of the spectrum are those who would think that the unemployment rate is capturing all we need to know.  If someone really wants a job, they would look for one, and there’s nothing interesting policy-wise in this information.  At 8.1% unemployment there’s still plenty of slack in the labor market. (There’s an unemployment crisis at 8.1% unemployment!)  The answer of the "true" unemployment rate should be somewhere in the middle.

I am certainly one if not the primary member of “those who think the unemployment rate is capturing all we need to know”

As will come as a shock to no one I have deep philosophical as well as practical reasons for pushing this stance.

The short-short on the philosophical is that there is no “true” unemployment rate. There are data collection and analysis procedures. Indeed, this extends to all of our interaction with “the world.”

Though its quite useful as a “sign post” of sorts to think that there are a certain number of people in America, when it comes down to brass tacks in what sense is “the number of people in America” a thing about which there is truth or something that is really just a figment of your imagination?

Now, in everyday life making these distinctions seems silly. There is no reason to force someone into recognizing that the existence of people they have never seen and never will see is just a highly useful figment of the imagination.

It does, however, become important when folks start getting into arguing over large scale statistics. They carry with them the useful figment that there really is a number of people in America and argue over whether the statistics are actually capturing that. However, there is no such thing. “At best”  – let us not dwell too much on what that might mean – there are the results of a hand count, the Census. But, no one thinks the hand count is “true” and in some ways its less useful than more complex statistical estimates.

Once you accept this then you realize the important question is “what do I want to do with this number” not whether or not it represents some alleged “truth.”

One thing we often want to do with numbers is compare things over time. This makes consistency an enormously important factor in choosing a measurement.

For example, “right track, wrong direction” is an excellent survey question not because we actually know what people mean when they say “right direction” but because we have been asking it for a long time, and we think people have been interpreting the question the same way for a long time and so we can usefully correlate it other things we want to know about.

U3, the standard measure of unemployment, does well on this scale. We have U3 measurements. We have measurements of standard unemployment going back to the 1940s and well-vetted estimates going back through the Great Depression.

This allows us to compare rates over time with accuracy. We do know for example, what the U6 unemployment rate was in 1953.

We’ve also invested a lot of time and energy into thinking about and testing the relationship between the standard unemployment rate and other measures we are concerned about such as inflation. We have at least a decent sense about what the “natural” rate of standard unemployment might be, and what it might mean for this natural rate to change over time.

Lastly, even as a theoretical matter, standard unemployment gets at the question we want to know – is the labor market clearing. For many reasons it might be the case that people want to work more or want to work less. This could have to do with the prevailing wage, tax rates, government benefits, the return to education, personal wealth and yes the difficulty finding a job.

However, if the labor market is functioning “classically” then people who want a job should be able to find one. If there are lots of people telling us that they are looking for a job but can’t find one this tells us that classical economics has broken down.

I won’t defend it here, but my underlying contention is that it is the goal of macroeconomic policy to “classicalize” the economy. That is, what we want to do is create an environment in which the intuitions of classical economists holds. Once we’ve done that the job of macro policy is done and the question then becomes one between a laissez-faire and a more interventionist economic policy.

This is in part why I flew off the handle at Raghruam Rajan’s piece. In a piece entitled “True Lesson’s of the Recession” he seemed to largely ignore the non-classical elements of any economy, not even addressing the notion that recessions proper are impossible in a classical world.

As such large movements in U3 and a failure of classical precepts are fundamentally intertwined.

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