Monday, May 23, 2016

What Does the Unemployment Rate Measure? Labor Market Slack or the Social Stress of Joblessness? Why Does it Matter?

The unemployment rate published monthly by the Bureau of Labor Statistics is one of the most widely watched of all economic indicators. But why? What does it really measure?

The news media, politicians, and voters tend to see the unemployment rate as an index of the social stress of joblessness. There is ample evidence to support that view. Researchers have linked high unemployment rates to increased mortality and impaired mental health. A recent cross-sectional analysis shows a strong relationship between unemployment  and suicide. There is evidence that unemployment undermines personal relationships, although the impact on divorce rates is ambiguous: A weak job market can break up some couples while leaving others stuck in bad marriages because they can’t afford divorce. Rising unemployment is also associated with higher crime rates, for both violent and property crimes. There is even something called the misery index, which is the sum of the unemployment rate and the inflation rate.

Economists, on the other hand, more often view the unemployment rate as an indicator of economic slack. People who want to work but are not working are a wasted resource. Finding jobs for them would add to GDP. Monetary and fiscal policymakers watch employment indicators closely because the more slack there is in the labor market, the more room there is for economic stimulus without risk of inflation.
The questions we need to address, then, are, first, can the standard unemployment rate do double duty as an indicator of both macroeconomic slack and social stress? And if not, what might be better?