High-Stakes Musical Chairs: Fixing the Downward Bias in the Unemployment Rate

October 10th, 2014 at 8:29 am

Ever since the JOLTS (Job Openings and Labor Turnover Survey) came into existence, labor market analysts have looked at the ratio of unemployed to job openings. In fact, the BLS publishes that very metric monthly (see chart 1 here). My old EPI colleague Jeff Wenger used to call it the “musical chairs” number, as when it goes up (high levels of job seekers per job), you can envision a bunch of folks trying to get the one seat/job when the music stops.

The figure below replicates the BLS line—it’s the non-blue one (sorry, color blindness strikes again)—and it shows that while the number of job openings per worker climbed to almost seven during the downturn, it’s now pretty close to its pre-recession level.

But that’s partly because our measure of unemployment is biased down right now, for reasons I articulate here. And if that’s the case, then a measure like this will look better, where “better” means a tighter match between labor supply and labor demand, than it really is.

We’ve (CBPPs Bryann DaSilva and I) developed our own version of a more complete measure of the job market slack based on the work of IMF economist Andrew Levin. It’s built off of three inputs: the ‘unemployment gap’ (the unemployment rate minus the so-called “natural rate of unemployment”—the lowest jobless rates associated with stable inflation according to CBO), and gaps in labor force participation and involuntary part time work.

This result is a measure which arguably adjusts for the downward bias in the current unemployment rate and therefore paints a more realistic picture of the amount of slack in the labor market.

Turning back to the figure, unlike the standard measure, the more comprehensive alternative has not reverted to its prerecession levels. It has fallen considerably, but its current level is just about equal to its peak in the previous downturn.

In other words, when we correct for current biases in the number of unemployed, the jobless are still engaged in high-stakes musical chairs, with too few chairs when the music stops.

jolts_2

Source: BLS, our version of Levin’s slack measure (see text)

 

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10 comments in reply to "High-Stakes Musical Chairs: Fixing the Downward Bias in the Unemployment Rate"

  1. Oliver Sherouse says:

    Fascinating, but could you include a link with more details on the construction of the alternative measure?


  2. Carl says:

    There is no doubt some musical chairs going on- those with chairs can move on to a different chair. Those without chairs really don’t compete well in the current market.

    I wonder how much FT workplace re-entering of the underemployed and uncounted unemployed will occur in the next year or two. Honestly, the stigma of unemployment and underemployment is a huge deal in the eyes of most employers and HR departments.

    For all the efforts and appearances that employers are ‘matching’ people with jobs with keywords and computers, hiring someone is generally an exercise in human judgement. It’s therefore highly impacted by perception, notions of “social proof”, and appearances.

    I mean.. “if no one has hired them/if they don’t already have a job, there must be something wrong with them…”
    (It’s no different than wanting the hot guy who already is dating the cheerleader instead of the cute shy guy in the back of the class.)

    Essentially, will the ‘stink of leprosy’ that under and unemployment carry wear off when demand picks up?


  3. urban legend says:

    Why don’t we just listen to what working-age adults tell us — that they want a job whether or not they fit into the subset that is defined by an arbitrary cut-off, or that they want a full-time job instead of a part-time job? The U-6 does that, and it’s at a very, very weak rate just under 12%. That is almost 50% higher than it was in late 2006, and its components — those marginally attached to the labor force (including the subset who affirmatively say they are discouraged) and those who have been forced to take part-time instead of full-time jobs — are comparably higher. It’s over 80% higher than it was in 2000. Long-term unemployment (by its various measures) is roughly double what it was before the collapse, triple where it was in 2000.

    Because the U-3 has dipped lower than its historical relationship to the U-6 (5.9 vs. 11.8, or 50%) rather than the 54-61% that applied from its inception until 2012 or 2013, and because the U-3 was designated as the official rate and suggests a tighter market than the U-6 says it is, the tendency has been to act as if it doesn’t exist. However, it is the U-6 that has a consistent definition pre- and post-Great Recession that is unlikely to be affected by behavioral changes brought on by the very conditions it is measuring: the tendency, for example, to get discouraged and stop fruitless active searching, and maybe even adjusting reluctantly to doing something different like going to school, when the job market is very weak, while still wishing for a job somewhat related to one’s job experience and keeping an ear to the ground. It is reliability of the current U-3, in other words, because it depends on an arbitrary definition, that is the measure that should be questioned because of the change in the ratio in the last year or so, rather than the other way around.

    All of these measures we have been taking for many years say we have a long, long way to go. Although I understand the felt need because too many in positions of influence really don’t care what data like this says anymore, we really don’t need imaginative constructs to tell us that.


  4. Fred Donaldson says:

    Comparing total job openings, period to period, is misleading and may offer generalizations that wrongly affect government and business policies.

    For example, if 60% of job openings paid a median of double the cost of living last year and only 40% of openings are at that level this year, the job opening rate could be the same, although the economy would be far worse.

    If there are no openings in your field – biologists, chemists or dog catcher – combined job opening statistics are meaningless. Some workers have virtually no job openings with 50 seekers to one position, while others have many opportunities if they like to work midnight shift for $7.25 an hour at a chain restaurant or take that often advertised marketing job – calling the elderly with scams from boiler rooms..

    What is a job opening lifts the lid on more bad beans. Companies who offer a $40,000 job for $20,000 will probably never fill the position, and perhaps they only advertise for reasons of gaining visas, or just scaring current employees into thinking their job will go away to someone willing to take half the going wage rate.

    Quantity of hours means a big difference in the so-called jobless rate. If you work 30 hours and used to work 50 hours with overtime, that doesn’t impact the job opening rate. If your recent job had benefits and you were separated to get a job with no benefits, you will suffer, but the jobless rate stays the same.

    Someday, because nearly all of us have access to computers, some genius will wake up and offer a new way to get real information on jobs, wages, unemployment, benefits – just by asking for a survey online of American workers each month. Real numbers would be so refreshing.


    • Carl says:

      You’re right- on paper, at least. There is a lot of underemployment not measured, and this is a potentially good idea, but I fear that, with such a survey, one would miss out on the livelihoods of the poorest of the poor, rural pockets of poverty, etc. Lots of non-middle/upper class people don’t live their lives on computers. Survey response rates are generally abysmal, and such a survey would miss out on a sample of the most vulnerable/poor. They would be too busy or too frantically trying to make ends meet to take a complex online government survey. I guess we’re stuck with telephone surveys.. apparently some people answer telemarketing/survey phone calls. I surely don’t.

      Also, most jobs – from middle and high skilled to the low-skilled jobs that you highlight are nearly unobtainable when they are fake jobs, jobs for which interviews are held for months but no one is hired, jobs with psychotic bosses who cause high turnover, etc. Over-reliance on computers and HR departments to match people with jobs is horrifically inefficient. See Peter Capelli’s stuff, etc.

      There is so much grinding poverty in this country, but, honestly with the leaders we have, it doesn’t really matter what the populace says. No one cares. The elites will continue to do as they please, all while people struggle to keep their heads above water.


  5. Mario says:

    It makes a lot of sense when you think of the job market as musical chairs to account for part-time workers who are still looking for full-time work since those applying from unemployment would have to compete with them. Labor force participation gaps are a bit trickier, however, and I’d be interested to read more about the nuance in finding out who’s actually stopped looking and who’s still trying to compete from the outside


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