Another one of the positive side effects of the current economic crisis is that even the government’s statistics, once accepted uncritically by the media, are now faced with some skepticism. As someone who examines government statistics often, I can say that government stats definitely have their uses, assuming you consider the methods used, and take it all with a grain of salt. But for years, the stats had been accepted as gospel and as a reliable foundation for the practice of macro economics.
To be sure, this article at Fortune today doesn’t actually impugn the unemployment rate itself, but it does question its relevance. Titled “The increasingly irrelevant unemployment rate,” the article notes that the unemployment rate, touted for years by the government and the media as a reliable index of economic strength, doesn’t really give us a good picture of reality anymore – assuming it ever did.
With labor force participation at the lowest point in a generation, the addition of the few new jobs added in May hardly convinces us that the economy is improving, and indeed, as new jobs were added – some of those people who gave up on finding work rejoined the workforce and drove the unemployment rate up, not down.
So, the unemployment rate tells us nothing without an understanding of labor force participation, and that is a pretty iffy number. It’s now becoming well-known that the method used to generate the unemployment rate is fatally flawed. The survey method used in the Household Survey ignores all the underemployed and chronically unemployed people who would love to have a full-time job. The labor force then only really consists of recently unemployed and people who absolutely must have jobs now. This excludes recent college grads living in their basements and stay at home moms who would otherwise be wage earners, and earl-y retirees who can’t find another job.
This is a huge shadow inventory of unemployed people not picked up in the official unemployment rate. Who can take a politician seriously who quotes these stats as proof of anything?
And for that matter, who can take a macro economist seriously who attempts to manage the economy this way? The decline in the reputation of government stats also nicely follows the decline of faith in macro economists to manage the economy to perfection. Does anyone think that a macro economist feeding the unemployment rate into a computer model somewhere will know just what to do? That dream died in 2008.