Different metrics all describe the same thing – labor conditions: Response to Nate in Seattle

We’ve taken a couple of months off from the IDEA effective unemployment rate – our simple straightforward measure that replicates the pre-2008 unemployment rate. (Find the original discussion of the IDEA effective unemployment rate here.) The description and rationale have not changed from the first edition in March 2014. Behind them lies the premise that the unemployment rate and the participation rate measure the same thing – labor conditions. We contend that other measures, such as unemployment claims, wages, hours, part-time employment and even productivity, also describe what is often called the labor “market.” If these metrics diverge it is a problem of measurement, not a schizophrenia in labor conditions.

Beginning in 2008, an easily observable and widely noted drop in workforce participation occurred. It was common to hear, “The improvement in the unemployment rate is largely due to people leaving the workforce.” In a healthy labor market, unemployment and participation vary inversely, both measuring increases in employment. Figure 1 displays both the long-term stability and the inverse relationship.

Figure 1

When labor conditions are good, when the unemployment rate goes down, the participation rate goes up. In the graph, this is when the yellow line is falling. In the current market, the unemployment rate goes down BECAUSE the participation rate is dropping.

It was a simple matter to take a long-term average of the participation rate, subtract the contemporaneous participation rate and add this difference to the official rates to come up with an effective measure that corresponds to pre-crisis numbers. Since we have lost over three percent of the labor force since 2008, the effective rate is then three percent higher than the official BLS number. (The latest comparison is 8.9 vs. 5.3 on the headline and 14.0 vs. 10.4 on the all-in U-6.)

Figure 2

Nate’s objection, raised on Twitter, was that no long-term stable participation rate as we described existed. We simply disagree. We have taken 66.2 as this number from 1992 to 2007. (See the data on the website.) Whether it is a tenth of a percent or half a percent higher or lower does not prevent the result from being substantially more useful in comparing to the pre-crisis rates.

Others have proposed that the drop in participation is a demographic event caused by boomers retiring in the natural course of their work lives. Again, one makes a mistake, even with retirement decisions, if one assumes they are insulated somehow from general labor conditions.

Retirement from some occupations is mandated by the nature of the work; that is, an older person simply cannot physically do it. On the other hand, there is no want of anecdotal evidence that people are delaying retirement because they cannot afford it. Their 401ks have become 201ks and their savings are simply not adequate. On the other hand, reports are widespread of older workers who lose their jobs and cannot find other employment, and so are forced into a modest retirement often funded by social security. Further, we find that employment since the crisis has actually grown among older workers, while it is still in net decline for others.

Figure 3

But it is simply not credible that a substantial increase in healthy retirement and the collapse of the economy in 2008 occurred simultaneously.

Similarly, weakness in wages and salaries is contrary to a presumed strength in employment. Although weakening earnings have been evident since the de-industrialization of the economy under Reagan, wage pressure ought to be evident if employment conditions are accurately depicted by the drop in official BLS rates.

Figure 4

Healthy labor conditions would show strong wage growth.

Productivity itself is a measure of labor conditions. While this is contrary to the conventional view, which without supporting evidence ascribes productivity primarily to exogenous technologies, some evidence shows that the source of productivity gains is healthy labor markets. One hypothesis is that with the approach of full employment, managers are motivated to look for efficiencies. These may come from new tools (i.e., technology), but they may also come from more efficient processes, or simply shifting workers to more productive tasks. The graph below shows the unmistakable correlation between the pre-crisis unemployment rate higher productivity. (The full paper is here. By “The Rule of Eight”, zero productivity growth implies a headline unemployment rate of 8.0.)

Figure 5

A proper metric would combine all aspects of labor conditions: wages, unemployment, participation, productivity, hours worked, full- or part-time, etc., etc. These are each a different side of the same animal. One cannot accept a series of measures which contradict each other, or if one does accept such, one must also accept confusion.

Confirmation bias is rampant in this discussion. Tepid employment growth is seen as “solid;” meager wages gains are labeled “the start of improvement;” zero productivity increase is blamed on workers; and so on. The reader ought to suspect confirmation bias from us as well, as we see an economy struggling under a load of private debt and no help from the source of growth – public and private investment. Our “stagnation” is another’s “stable, if modest, Improvement.”

There is obviously much more that could be said, but to the point at hand, the effective unemployment rate: In a situation of unhealthy labor conditions, as labor goes underground or people choose not to commodify their activity (“leisure “ in the textbooks) or simply cannot afford to work for the skimpy wage and make other arrangements. This reduction in participation measures exactly what the unemployment rate measures from a different angle, so it is entirely appropriate to combine the two, as does the IDEA effective unemployment rate. The fact that it is simple ought not to detract from its descriptive value.

POSTSCRIPT

As noted in the original article, the Fed combines different metrics for labor to assess full employment, one of its mandates. Its calculation may not be so simple as ours, but it has to be apparent that all metrics should be pulling in the same direction. If September sees a raise in interest rates, a decision of enormous importance to Wall Street, we suspect it will be driven not by an improving labor market, but by the evidence that five years at zero have produced little growth and much distortion.

Alan Taylor Harvey

 

Has Schäuble overplayed his hand?

It is too early to tell how problematic for the Germans the outrage over their attempted takeover of the Greek political system will be. (See #This is a coup.) But it is now clear that this is not only bad economics, but bad politics.

There should be no disagreement that it is bad economics. Five years of austerity in Greece broke the economy. The confidence fairy never showed up. Austerity – cutting everything except the sacred debt – has not worked, will not work, cannot work.

There is a reason he IMF and Neoliberalism were kicked out of Africa and Latin America. The radical free market economics caused the same damage there that it has in Greece. The same “shrink your way to growth” mandate led to the same results. And another lesson was taught again: The Neoliberal agenda is immune to logic, evidence and compassion. Its enforcers, the “technocrats” installed by the Institutions, are aptly described by Paul Krugman:

What Europe calls technocrats aren’t people who know how the world works; they’re people who subscribe to the approved fantasies, and never change their minds no matter how badly wrong things go. Despite the overwhelming evidence that austerity has exactly the dire effects basic textbook macro says it will, they cling to belief in the confidence fairy. Despite a striking lack of evidence that “structural reform” delivers much of a growth boost, especially in an economy suffering from a huge output gap, they continue to present structural reform — mainly in the form of disempowering workers — as a sovereign remedy for all ills. Despite a clear record of past failure, they continue to push for asset sales as a supposed answer to debt overhang.

In short, what Europe usually means by a “technocrat” is a Very Serious Person, someone distinguished by his faith in received orthodoxy no matter the evidence.

A raft of economics has lined up with the Greeks. The economics of the matter are not much different than a corporate bankruptcy, where debt is restructured to make operations viable and hence maximize returns for creditors.

But it is not just bad economics, it is bad politics

In Germany it is the politics of blame. The Greeks are the new Jews, morally deficient, culpable for crimes they never committed, deserving of punishment. Greece and Ireland absorbed the surpluses from Germany and France and took the hit when the crisis came down. As Yanis Varoufakis correctly says, “The Periphery’s exorbitant debts were essential for the industrial machinery and banking systems of Germany and France to prosper given the problematic bank-based recycling system.” (And be clear, it was not the German or French taxpayers that loaned money to the Greeks. It was their banks. The supposed bailout of Greece in 2012 was in fact a backdoor bailout of German banks.)

Now the politics has lined up so that the only successful path is for the Greeks to pay back unpayable debts. Schäuble and the Germans have forced the Eurozone into a dead end with their unwillingness to address reality. With five months to take a step-wise approach, they instead insisted on a “comprehensive conclusion,” which is now transparently revealed to be a demand for the Greeks to forfeit any control over domestic policy. The German negotiating strategy was bait and switch, and the last switch was the first proposal, delivered as “take it or leave it.”

The Greeks have now accepted a proposal that was likely designed to be unacceptable. If this clarifies the dynamics for the world, it may prove to be the undoing of Schäuble, Merkel and the Troika. It must now be evident that the Germans are ruling from power, not reason, and that they are perfectly willing to evict a member from the Eurozone in spite of all assurances it was not possible. Trust is broken. When this arrangement fails, as it must, and likely at a time when others are facing the same asphyxiation by debt, will it be the Greeks or the Germans who are lined up for blame.

Alan Harvey

A Sad Day for Europe

The debate over Greece has an eerie resemblance to the debate over climate change. One side prefers apocalypse to changing its opinion, even in the face of evidence. In fact, as the evidence mounts, the denialists become only the more rigid.

In the case of Greece, the Troika consistently refused to engage the economic issues and evidence. Has austerity worked? Would the course preferred by the Troika result in better results for creditors? Does the hard line improve the prospects for European unity? Have the finance ministers served their respective states, or asked accountability from the banks? No, no, no, no and no. Yet the Neoliberal conviction and prescription is held ever more tightly.

Clearly austerity has not worked and has no prospect of working. Greece is in the condition it finds itself today because it, under pressure from the Troika and after signing the ill-begotten 2012 Agreement, enforced austerity as no other European state has done. The Greek people had five long years, since 2010 to witness that the actual results of attempting to shrink your way to growth are exactly as the Keynesian theory describes.

Clearly creditors are worse off. And acceptance of the Troika line would have only meant default on a larger debt. The best outcome for them (the creditors) would have been to restructure the debt into a form that allowed Greece to recover from the austerity-induced depression and get at least some return. But when the "they" who held the debt became the taxpayers of the states rather than the banks, their financial interests became secondary.

Would the capitulation demanded by Schauebel and the Troika improve prospects for success in the European experiment? That is a laughable proposition. In grim fact, the entire negotiation has been a spectacle of destroying any trust between states and giving lie to any democratic pretense under the EU. It must now be clear that the European Union, the European Central Bank and other institutions are instruments of control, not cooperation. In demonstrating the full power of their bargaining position, the Troika has exposed the depth of their devotion to a top-down Neoliberal agenda.

And there is really no debate on the economic points. The Troika does not deny that austerity was a failure. The Confidence Fairy never came. The privatizations, evisceration of labor protections and cutting of already scanty pensions did not lead anywhere but down. Nor do they deny that it would fail again.

The Troika does not deny that creditors, taxpayers and economies would be better off were the terms of debt made sensible. Nor does it deny that the private banks were bailed out at the expense of European taxpayers. The Troika  merely ignores the substance -- the economics, the financial realities, and the real sacrifices of the Greeks -- and moralizes from a position of no moral authority.

It is a sad day for Europe.