There has been a lot said on the topic of unemployment in recent months. On the one hand, unemployment numbers have been incredibly positive. In its last policy meeting, the Fed boasted a 5.7% unemployment rate, and “Net hiring during the November-to-January stretch, at more than 1 million, accelerated to its faster pace for a three-month period since 1997,” according to the WSJ. Those numbers would seem to indicate a boost in wages, as well as a boost in inflation, which has simply not been the case. First, we need to address the definition of unemployment. As Barry Ritholtz plainly states in his editorial, it is incredibly easy to look up the definition of unemployment. There are four main concepts that define employment/unemployment he writes:
- People with jobs are employed.
- People who are jobless, looking for a job, and available for work are unemployed.
- The labor forceis made up of the employed and the unemployed.
- People who are neither employed nor unemployed are not in the labor force
In his editorial, Ritholtz ridicules prominent figures in the business world that call the unemployment figures a conspiracy. For example, Jim Clifton, CEO of Gallup, recently wrote an essay entitled “The Big Lie,” in which he explains to the American public that the low unemployment numbers are a hoax because they do not include people who stopped looking for work. Ritholtz destroys Clifton, claiming that the definition of unemployment is a basic economic concept that anyone can lookup. He writes, “the technical definition of unemployment is well known, and easily discoverable. The only reasons anyone who wants to understand this but does not are: a) ignorance b) laziness c) bias and d) some combination of all three.”
I think Ritholtz is coming down too hard on Clifton. While there is no denying that the definition of unemployment can easily be looked up and understood, it doesn’t mean that Clifton doesn’t have a point. In economics, it is taught that there is an inverse relationship between unemployment and inflation:
“At the heart of the challenge facing the Fed is a notion in economics that there is a short-run trade-off between unemployment and inflation. At some low rate of unemployment, the thinking goes, slack in the job market disappears; if unemployment goes below this point then wage and inflation pressures build as firms compete for a dwindling supply of workers.”
So in response to Ritholtz, if the unemployment numbers really are what the government claims they are, then wouldn’t we have seen an increase in inflation or a rise in wages? While Clifton’s claims might not be revealing some big secret, we can interpret his essay as broader statement about the bias of the labor participation rate, and how that may be an explanation for the fact that inflation has run below the Fed’s 2% target for 32 straight months.