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Measurement error

20 August 2014 By Edward Hadas

Give Janet Yellen credit. The chair of the U.S. Federal Reserve is keen to use monetary policy to help get more people into good jobs. Her priority – work is more important than finance – is reflected in the subject of this week’s get-together for the world’s central bankers: “Re-Evaluating Labor Market Dynamics.” One item should be on the agenda of the distinguished guests at Jackson Hole, Wyoming: how to replace the concept of unemployment.

The suggestion may sound frivolous, but the idea of a simple measure of unemployment is tied to a wrong view of how modern economies work. The unemployment rate made sense in developed economies a century ago, when workers were men who wanted full-time jobs as soon as they finished school, and to continue until they died or retired. In that world, unemployment was easy to define – working-age men without a job.

That binary split of employed and unemployed no longer exists. Many people nowadays drift in and out of paid jobs, shifting back and forth from full to part-time work. Some move in and out of the legal economy. Transient self-employment is common. Retirement is a flexible concept. Parents and other carers sometimes balance paid and unpaid labour.

Students, prisoners or disabled people at any time could and might want to work for pay. And paid employment cannot always be interpreted as a sign of a well-functioning labour market: jobs may be precarious, ill-suited to the worker’s skills, or pay less than a living wage.

In such a complex environment, it makes no sense to judge the labour side of the economy with the outmoded concept of unemployment. Labour market policy should not focus on the 6.2 percent unemployment rate of the U.S., or the 11.5 percent rate of the euro zone. It should instead address inadequate labour situations – where labour-poor people are counted as either employed or as not in the workforce.

Current labour market measures are based on the outmoded binary employment model. Yellen recognises that weakness. She is fond of the “quit rate,” a measure of willingness to switch jobs, but no current measure really captures the many shades of labour market grey.

A “bad jobs index” could work like this. Ask people enough questions to rate individuals’ labour situations. The highest number would go to those whose work, paid or not, is suitable to their skills, needs and wishes. The bottom would be for inappropriate labour positions. The national index would be a national average, calculated with the usual sampling techniques. Lower readings on the index would mean bad news.

It won’t be easy to agree on how to measure bad labour positions. The distinction between “good” and “bad” supposes moral judgements about how working lives should be arranged. Controversy lies ahead.

There may still be a broad consensus that anyone who wants paid work should be able to find a job that is reasonably secure, appropriate to his or her skills, and fairly paid. It is a little more controversial to suggest that those who are not in the paid workforce for some valid reason – whether study, advanced age, incapacity or valuable unpaid labour – have a good labour position.

In any case, the consensus must be refined, because it’s impossible to judge how well the labour market is working without agreeing on what it is supposed to do. And one thing is certain: today’s labour market should do more than minimise the current, arbitrary measure of unemployment. Better to struggle towards a new agreement than rely on an old measure which misses much of what is going on. Besides, it would be easy to publish enough data for observers who do not like the new standard index to construct their own alternatives.

For Yellen and her central bank peers, a new index and the analysis behind it would present a problem. It would show how little the Jackson Hole crowd can do to reach the goal of tackling the job question.

Even if monetary policy can do something about the measured unemployment rate – a big “if” – most of today’s labour maladjustments cannot be cured purely by financial or monetary measures. They can only be addressed with changes in laws, regulations, organisational structures and accepted work practices. Central bankers may help stimulate investments, but they cannot scratch where the labour market itches most.


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