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Unemployment Can Be a Good Thing

People don't always stay out of the labor force because they have no choice — but statistics don't take this into account.

Tim Worstall


May 5, 2008 - 12:00 am

One thing that rather seems to annoy a certain type is that by the standards of the last few decades the unemployment rate has been really low in the US during the Bush Administration. This despite the “weak economy” and the appallingness of having a Republican in the White House. Clearly, this could not be allowed to stand as it is and thus something other with which to browbeat everybody must be found. Like, for example, the employment to population ratio.

A little explanation just to set the scene: the unemployment rate, which has been either side of 5% for some time now is not in fact the number of all those without work. It’s the number of all of those who would like to work but who are not doing so (yes, there are further details but they’re not important to us here). We say that those who are currently working plus those actively looking for work are the labor force: when we measure unemployment that 5% or so rate is that, of 150 million people in the labor force, 7.5 million of them can’t in fact find work. But the population in the US is 300 million people: where are all the rest accounted for? (Please note that I’ve rounded all of the numbers in this, simply for convenience sake. They’re accurate only for the purposes of the argument.)

First, there’s a few more than 4 million births each year so the group of Americans under 16 is around 80 million. So we still have that 70 million to account for: the difference between the adult population and those in the labor force. Who are these people and further, should we actually worry whether they’ve got a job or not? What we do here is we take that number in employment and compare it to the population of the correct age that they could be in the labor force if they were actively looking for work. This is called the employment to population ratio.

Well, clearly, some people do worry about it. Paul Krugman, The Big Picture, Angry Bear, Jeff Frankels — there’s some economic heavy hitters among those names, but are they entirely correct to worry so?

The true answer, as with so much in economics, is that it depends. We can construct scenarios whereby it’s a very bad thing indeed for people to drop out of the labor force: people who are so discouraged by the possibility of ever landing a job that they don’t in fact bother to pursue one any more. Or perhaps people rotting on welfare: this was the justification (at least according to my old Professor, Richard Layard, who helped create the reform movement) for the welfare reform of the 90s. Instead of letting people waste their entire lives on welfare checks, get them back into the labor force at least, so that they are trying to get jobs.

But there are other people out there that we’re entirely happy to have outside that labor force. Mothers of young children might decide that they would rather raise them than slop hambugers: and who are we to say they’ve made the “wrong” choice? There’s also the retired to consider. What we really want to do is to sift that population out of the labor force for those who are out by choice (a good thing, it’s liberty and freedom in action) and those who have been pushed out (a bad thing, a negation of that freedom and liberty). Unfortunately, we don’t really have any good way of doing this sifting. Other than going around each individual out of the labor force (or some statistically significant subset of it) that is, and no one has done that as yet. So we try to divine the truth from the information we do have.

And that’s what those links above are to, places where people have looked at the employment to population ratio and declared that the jobs market is in fact worse than the straight unemployment rate would lead us to believe. For those who are economically inactive, the percentage of the adult population that not only doesn’t have a job but isn’t looking for one has risen. And, of course, the assumption is that they’ve been pushed, not chosen, and that this is thus a bad thing.

But perhaps it is in fact a good thing? Perhaps this change in the size of the labor force is a result of individual choices rather than people being pushed?

One oversight, in the numbers used by Professors Frankels and Krugman is that they are using numbers from the Bureau of Labor Studies which show the entire population of 16 years and older. Plus, they’re not accounted for the fact that the population itself is getting older. No, I don’t just mean that each individual is getting a day older, a day at a time, but that the age composition of the population is changing. We’ve got a lot more old people than we did even a decade ago. Not only are the baby boomers beginning to retire but those already retired are living a lot longer than the age cohorts before them did. So of course we would expect to see the employment to population ratio change: do you or anyone else think it a bad idea that those 80 year olds on their Medicare Viagra are not having to work or look for it?

There’s another related point made by William J. Polley. From the Congressional Budget Office, we find that many more 16-19 year olds and those 20-24 are staying in school and education, thus lowering substantially the employment to population ratio at that end of life as well. Something which, given all that talk about the “Knowledge Economy” we might think a good idea.

However, to be scrupulously fair, we also have to point out that the ratio did indeed fall amongst the 24-54 year old group, but markedly less than amongst the total adult population.

My own guess is that the entire effect, this fall in the employment to population ratio, is made up of a series of such desirable points. That there are more older Americans, those really and fully retired, that there are more younger ones staying in school: the fall in the ratio for the middle age group might simply be more women deciding to make homes rather than careers perhaps. One of these problems that, the more one analyzes it, the more one realises that it’s not in fact a problem at all: rather like the gender pay gap. The more you look at that one, taking account of career breaks to have children, of part time working to raise them, of the sectoral choices that women make, of the slight squeamishness many women have about hard negotiating for their pay, the higher level of sick leave, the more it seems there’s no room left for there to be any direct discrimination in the fact that there is indeed a gender pay gap.

Even if I’m wrong about the full explanation being of this benign sort, I’m absolutely certain that a large part of it is.

So next time you see one of those ruminations about how, while we do have a low unemployment rate, what really matters is that we’ve got a low employment to population ratio, just mentally add the following headline to it:

“Kids staying in school, Americans living longer: Bush Blamed.”

Hey, works for me.

Tim Worstall is an Englishman who has failed at many things. Odd bits and pieces of his writing have been known to turn up in the Times, and the book pages of the Daily Telegraph

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