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Aside on Labor Utilization: From the March 17, 2011 IAS 107 Lecture

The current seasonally adjusted unemployment rate in the United States is 8.9%. However, not 8.9% but 9.5% of those interviewed by the Bureau of Labor Statistics in the second week of February who were either at work or actively looking for work said that they were looking for work and had no job. But the Bureau of Labor Statistics calculates that for the March unemployment release, unemployment is 0.6 percentage points higher than in an average month because February is a slack month. Businesses are still recovering from the Christmas rush, construction in the northeast and the Midwest is still at a seasonal low, and so forth.

The fact that the unemployment rate kissed 10% at the end of 2009 and since then has declined back down to 8.9% seems like good news. The unemployment rate rose steeply from its normal level of 5%, crossed 7.5% at the start of 2009, kissed 10%, and since has started back down. But the unemployment rate has not fallen because the share of American adults with jobs has increased. The share of American adults with jobs today at 58.4% is actually less than the 58.5% of Americans who had jobs when the unemployment rate kissed 10%.

What is happening? If no greater fraction of people are working, why is it that the unemployment rate has been going down? Unemployment rate has been going down because people have been dropping out of the labor force. people who a year and a bit ago would have said "yes, I'm looking for a job" are now saying: "I've given up. I'm no longer looking for a job."

This does not mean that they are doing nothing at all: they are, for the most part, not spending all day watching reality TV auction shows or playing World of Warcraft 24/7.

Most of them are occupied, but occupied doing things that they value less than having a job and earning the money. If you think, as I do, that the employment population ratio is probably a better guide to the health of the labor market and to the extent at which the American economy is working up to its economic potential, we have not seen any improvement in the labor market over the past 15 odd months. The labor market is still as bad as it was back then.

This is quite distressing to me along three dimensions: as a citizen of the world--because the world labor market is in much the same state--as a citizen of the United States of America, and also as a neoclassical economist. Let me talk about this last. We neoclassical economists really do believe that markets are extraordinarily flexible, powerful, and adaptive social institutions. Web believe that they recover from shocks. We believe that if something goes wrong with the market system and it finds itself out of equilibrium with substantial excess demands or excess supplies, that it will right itself and crawl its way back to supply-demand equilibrium quickly.

It might not fix itself as quickly as we would wish. We might well want to have the helping hand of the government pushing it back to equilibrium. But the idea is that a period of high unemployment with lots of people who want jobs and could do jobs and do not have jobs not fixing itself--that a period of fifteen months after the downturn ends with no sign of any return toward equilibrium in the labor market--that is very distressing for us neoclassical economists. That calls for some rethinking of our visualization of the Cosmic All...