Problems with simple data

By Fester:

Brad Delong is looking at the expected increase in short term unemployment rates due to the passage of an additional three months of unemployment extension and forces himself to chuckle at the fact that President Bush signed a good piece of policy with severe negative political repercussions for John McCain:

The rule of thumb, IIRC, is that the average duration of an unemployment spell increases by 1/4 of the increase in the duration of unemployment benefits. Thus a 13-week increase in unemployment insurance duration should increase the average unemployment spell by 3 weeks. With current mean unemployment spell duration at 17 weeks, and with roughly 2/3 of the unemployed eligible for UI, this would produce a 3/17 * 2/3 * 5.5% = 0.6% increase in the measured unemployment rate.

It seems to me likely that--whatever happens to the economy--George W. Bush has just produced four bad unemployment-rate headlines on the Saturdays August 2, September 6, and October 4. This cannot be news that John McCain is happy to hear.

I think the unemployment benefit extension is excellent policy on multiple grounds.  First, it massively reduces stress for unemployed workers and their households.  Finding a job that replaces most of an individual's lost wages is tough right now, so extra time is valuable.  Secondly, this policy provides significant reassurance to the vast majority of people who currently have jobs but fear that they could lose their jobs.  Increasing the contingent safety net of unemployment benefits allows people to breathe slightly easier when they make a discretionary purchase that they otherwise would not have made.  Finally as a stimulus measure, unemployment benefits are targeted to people who are cash flow constrained and are very likely to spend the additional income.  This produces a very high multiplier effect which stands in contrast to the low multiplier, untargetted impacts of general rebate checks.  This is good policy.

It will have its impact in encouraging people to find a better job rather than any job.  This will increase the unemployment rate.  It also illustrates the problems of tracking a single number to describe the whole picture.  A more comprehensive and accurate look at the US labor market would look at the unemployment rate, the workforce participation rate, the number of discouraged workers, and changes in hours worked and total compensation.  This more thorough look will show a summer labor market that will continue to slacken as governments begin to cut back, manufacturers down shift as inventory is too high, and energy is poised to consume 10% of GDP.  However it will not be quite as bad as the simple headline statement of the unemployment rate will imply. 

Comments

[Kirk]

My recent experience of being laid-off/unemployed showed me that in Georgia the official unemployment rate is vastly under-reporting the actual number.

My benefits were arbitrarily cut off after 8 weeks with no explanation given. When I inquired as to why I was told that I should have found a job by 'now'.

I wonder how often this occurs across the country.