US / The unemployment rate is understating the “true” amount of under-employment

The Fed/IMF/GS economists argue that the unemployment rate is now substantially understating the “true” amount of under-employment in the economy because the labour force participation rate has fallen as a direct consequence of the depth and longevity of the recession. They show that, while this effect does not apply during a normal recession, workers have become sufficiently disillusioned this time to stop actively looking for work, which means they no longer count as unemployed. Yet they would be drawn back into the labour market if the demand for labour rebounded strongly enough.

Evidence from the differing behaviour of the labour market in various US states, which have experienced economic shocks of varying severity, is used to support this thesis. The Fed/IMF paper suggests that the amount of disguised underemployment (ie the drop in the participation rate in excess of what is driven by demographic factors) is about 2 per cent of the labour force, while the GS authors suggest it is above 1.5 per cent.

Either way, it is a distortion which the Fed cannot afford to ignore. Its mandate requires that it should aim for “maximum employment”, not “minimum unemployment on the official statistics”, which is what it risks doing under its current forward guidance.

Chosen excerpts by Job Market Monitor

via The Fed dials the wrong unemployment number | Gavyn Davies.