One of the premises of the information age is that the information actually tells you what it is supposed to tell you. For example, the unemployment rate tells policymakers how the economy is doing and, for those who worry about inflation, how tight the labor market is. Yet, as a story in The Economist points out, the current low US unemployment number doesn’t necessarily answer the question about the tightness of the labor market.
A new paper by Katharine Bradbury of the Federal Reserve Bank of Boston should keep the question open for a while longer. The unemployment rate, she suggests, may be a poor measure of slack in the labour market. By her yardstick, there may be as many as 5.1m Americans who do not appear in the unemployment rolls, but who might rejoin the job queue if work were more forthcoming. If so, the “true” unemployment rate could be over 8%, not 5%; the true number of jobless 12.6m, not 7.5m.
The reason for the discrepancy is the discouraged worker. People are only counted as unemployed if they are actively looking for a job. If they aren’t, they are considered as outside the labor force.
What to do with people who are not actively looking for a job presents a major question for future statistics. In the industrial economy, it was rather simply – you were either working (employed), looking for work (unemployed) or not in the labor force (students, retirees, housewives, disabled). In the I-Cubed Economy, we expect that people will drift in and out of the labor force, for various reasons. Some may be voluntary retirees who could easily be lured back into the labor force it the right situation. Some many be those who are taking time off to recharge or reskill. Some may be the discouraged workers who have just given up. We need to make sure our data can account better for all this churn.
In the meantime, don’t take the unemployment number as a sign of a healthy economy. As the song from Porky and Bess says, “it ain’t necessarily so.”