Lies…

By Sunday, March 15, 2015 No tags 0

…damn lies and statistics.

You have probably hear the quote above – it’s from Samuel Langhorn Clemens, otherwise known as Mark Twain. He was never one to pass up the opportunity for a good quote and I never pass up the opportunity to mis-quote, so here’s another of Twain’s jewels; “The rumours of the death of the business cycle are exaggerated.”

During the ‘Clinton Era’ in the US (1990s…I keep forgetting how young IB students are these days) a goodly many economist foresaw the end of ‘boom-bust’ cycles and even the cyclical element of economic activity itself. There was half a decade of solid economic growth, low and stable inflation, and the rate of unemployment (4.5%) was far below the long-term estimate of 6% as the natural rate of unemployment (NRU). This gave rise to media stories putting forward that, due primarily to new technology and more efficient markets, the world was moving away from the peaks and troughs seen in the business cycle. The ensuing ‘Dot Com Bubble’ in the early 2000 pretty much did away with the notion that the business cycle was dead or even coughing blood.

Media hype went in the other direction in global downturn – ‘Great Recession’ – starting in 2008/’09 with a great deal of ink spilled on what was called a ‘jobless recovery’. The basis for this had some merit; even after the end of the 2009 recession, employment didn’t bounce back anything like previous recessions (see diagram below).

(Source: The Atlantic)

Then what was to be seen in the US economy was a long and drawn-out fall in unemployment rates (diagram below) where the official rate hit a low of 5.5% during March this year. Now the hype is of the ‘Back to normal business!’ flavour.

(Source; Yahoo Finance)

However – and this is a big ‘however’ – if one delves into a few core definitions and then looks up a few figures at the US Bureau of Labor Statistics (BLS), a somewhat different picture arises – one that does not indicate ‘Back to normal’ in fact.

Let’s get the definitional parameters in place and calculate figures given by the BLS (http://data.bls.gov):

1. Unemployment (U), as a percentage, is the number of unemployed divided by the total labour force (TLF) times 100. This would be the 8.7 million people in the US seeking employment in February 2015.

2. The TLF is the number of people between 16 and 64 that are working or looking for work – the TLF does not include those in education, institutions such as prison or disabled, people doing military service. In February 2015, the TLF was 157 million.

Unemployment rate = (U / TLF) x 100; (8.7 / 157) x 100 = 5.54%

Simple enough…until one looks at the underlying figures. It turns out that the labour participation rate (percentage of the population in the TLF) in the US has fallen quite considerably for some time now. In fact, the participation rate is now the lowest in 37 years. Not since 1978 (diagram below) has the proportion of the population participating in the TLF been so low.

 

So is the 5.5% rate misleading? Well, let’s say at least that while mathematically and technically sound, it leaves a few issues up for discussion – the type of discussion you should be able to hold in a Paper 2 question that asks you to “…evaluate…using your knowledge of economics and the data provided…”! Basically one need to question the final unemployment figure of 5.5% since the denominator in our calculation (TLF) has changed rather a lot.

You see, when the labour participation rate was at its highest (around the millennium shift) the US population was around 280 million people – giving a TLF of 187 million. By 2015, the population had increased to 320 million and the TLF is 157 million. An estimated 12 million additional Americans have left the TLF in the last few years; if these 12 million were to be included as part of the TLF and also unemployed, we would get a US unemployment rate of 12%, not 5.5.

However, we are left with a number of questions…and a few possible extended essay research questions. The main question is why millions of people left the labour force. Remember guys, the TLF is one which we have defined and thus is open to interpretation really. Have more young people stayed in school? Have more people retired and perhaps earlier? Emigration of young labourers?

No, I don’t have an answer. It does appear that one of my predictions to my students in 2005 (yes, I checked) is half-correct. I predicted that by 2012 we would see two things happen in the US: 1) a marked increase in retirees due to increasing income/wealth; and 2) a massive sell-off in shares to fund rather meagre US pensions for the ‘Baby Boom’ generation of the 1950s and 1960s that would cause a serious decline in the stock market. While I am still waiting for 2) due to various reasons, what does the BLS say about the reasons for the decreasing labour participation rate?

Basically that since the Baby Boom generation helped cause the high participation rates in the 1990s they also helped cause the low participation rates we see now. Yes, they got their ‘sod-off’ money together and are retiring early in droves.

I was going to say more…but there’s a problem with my computer…

20150315_151241

“Bored. Play with me.”

 

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