Stated alternatively, U3 headline unemployment is registering a declining unemployment rate that causes a false picture of the true unemployment picture as one needs to strongly consider the calculation of unemployment, specifically the army of discouraged workers [5.4 million] and the historically low labor participation rate. That during times of robust GDP growth unemployment should actually rise before it falls as the discouraged workers are attracted back to the labor force due to improving economic conditions which means the denominator of the calculation is flooded with new participants causing unemployment to rise is the short and medium term. Hence the current U3 unemployment rate measurement is argued as merely improving, in part, due to people leaving the work force [the rise of the discouraged worker]. Therefore, an improving headline unemployment rate is matched by a rise in the discouraged worker population meaning the unemployment rate yielded by the U3 calculation tells a false story.
Enter the state of Michigan! The denominator discussion above regarding the unemployment calculation goes to a new zenith in Michigan. What if a particular state’s unemployment rate, the calculation thereof , in particular the denominator “total labor force”, yields an improving unemployment rate due to entire households leaving the state at a rate on one every twelve minutes? Yes, a rate of 43,200 households per year leaving the state of Michigan! (1) (2) (3)
Hence the “total labor force” in Michigan is shrinking an incredible rate leading to a shrinking total labor force denominator in the unemployment rate calculation resulting, in part, to an improved unemployment rate. That is to say, the Michigan example goes beyond discouraged workers to the phenomena of “see-you-later-bye” workers.
Notes:
(1) Leaving Michigan Behind: Eight-year population exodus staggers state, The Detroit News, 04/02/2009
http://www.detroitnews.com/article/20090402/METRO/904020403/Leaving+Michigan+Behind++Eight-year+population+exodus+staggers+state?fark
(2) Muskegon County schools lose 800 students as families move out, Mlive, 09/30/2010
http://www.mlive.com/news/muskegon/index.ssf/2010/09/muskegon_county_schools_lose_8.html
(3) Michigan Unemployment Rate Below 10 Percent, Lowest Since 2008, Yahoo News, 12/17/2011
http://news.yahoo.com/michigan-unemployment-rate-below-10-percent-lowest-since-145700889.html
WEH:
ReplyDeleteWhile it's appropriate to consider the denominator, you seem to be obsessed with it.
First of all, there's an easy way to put an upper bound on the denominator problem (if you want to)--look at the proportion of adults who are employed. For Michigan, the annual employment-to-population percentage has increased from 53.6 percent in 2010 to 53.9 percent in 2011.
The employment-to-population percentage has flaws because it includes everyone 16 and over. So, we would have to account for more people 16-24 attending school full-time and an increasing share of the population that is past retirement age. However, it gives us some idea of whether the labor market is improving or getting worse.
Second, unless Michigan residents are moving outside the U.S., those subtractions from its labor force are additions somewhere else in the U.S.
Third, while you criticize the U3 measure, you fail to mention that every other unemployment measure (U1-U6) also shows improvements over the last year (http://www.bls.gov/news.release/empsit.t15.htm).
Mr. Ribar states:
ReplyDelete“While it's appropriate to consider the denominator, you seem to be obsessed with it.”
No obsession, merely adding insight about the denominator as many non-economists want to better understand the calculation and the measurement yielded by U1-U6 and SGS.
“Second, unless Michigan residents are moving outside the U.S., those subtractions from its labor force are additions somewhere else in the U.S.”
The post focuses on the Michigan unemployment figure and the exodus of households from Michigan and does not go further into national unemployment trends hence you’ve added something that does not exist in the post.
“Third, while you criticize the U3 measure, you fail to mention that every other unemployment measure (U1-U6) also shows improvements over….”.
The post does not criticize U3, it merely adds insight to U3.