Saturday, January 11, 2014

Unemployment is Down, Hooray!

In most of the employment reports over the last year, the headline unemployment rate has declined. This is almost invariable coupled with the caveat that the decline did not come from more people finding work, but from more people choosing not to look. (The denominator in the unemployment rate excludes anyone who is not trying to find work, such as children, the retired, and anyone who has given up looking.)
There have also been monthly employment reports where the employment rate ticked up due to an increase in the number of people looking for work. I hope you will forgive me for not recalling which months, or whether the uptick was lost in the revisions.
If a declining unemployment statistic is often a bad thing, and an increasing unemployment statistic is often a good thing, why is the statistic even being reported? It is clearly unable to convey how well the economy is doing.
One common alternative is the employment-to-population ratio. Unfortunately, the employment-to-population would be trending downward even in a better economy, because the baby boom generation is retiring from the workforce. A neat way around this problem is constant demography employment.
To calculate this statistic, you first divide the population into age groups. In Paul Krugman's post, linked above, he uses the groups 16–24, 25–54, and >54 because they are provided by the Bureau of Labor and Statistics. You then choose a reference year (2007 for Krugman). Finally, you compute the weighted average of the age groups' respective employment-to-population ratios, weighting according to the relative sizes of the age groups in your reference year.
Unlike the conventional unemployment rate, constant demography employment won't produce screwy numbers when people drop out of the labor force. Unlike the conventional employment-to-population ratio, it won't trend downward as the boomers retire. It is time to see this statistic included in the monthly articles on the employment report.

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