Calculating Unemployment Numbers

A few weeks ago I wrote that the administration had put a caveat in place when they promised to create or save 4 million jobs. Blogger Greg Mankiw picked up on the same thing and wrote about it here:

 

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The expression “create or save,” which has been used regularly by the President and his economic team, is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus.

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Repeating the point I made when I first mentioned this topic, there’s nothing wrong with saving jobs…but is that all we’re shooting for here? I’d like some real projections on job creationas a way of gauging the effectiveness of these massive spending programs. There’s also the question of so-called ‘relief jobs’ which haven’t been talked about much by the Obama administration, but will most likely be a part of the job picture. ‘Relief jobs’ is a term from the New Deal days and at that time it referred to a lot of ‘make work’ programs which were designed to put people back to work rather than risk civil unrest. The work they did was important and necessary, but very little of it was critical. ‘Relief jobs’ were more about national security that anything else.

As the government spends billions on infrastructure projects, much of this will be ‘make work’ or ‘relief jobs’ because these projects will eventually come to an end. So, should they be counted towards overall unemployment figures? Megan McArdle acknowledges this and says we should not count them:

 

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Whether you should count relief jobs as part of the unemployment figure really depends on what you’re trying to measure. If you’re trying to measure something about the worker experience, it makes sense to count relief jobs: they go there and they pick up a paycheck. But if you’re trying to measure how robust the economy is, you shouldn’t measure those jobs, because relief jobs do not vary in the same way as the underlying job market.

This is, I must point out, not an argument about whether relief jobs are good or not–I certainly think they’re preferable to other interventions, like long term welfare. It’s just an argument about what about the economy the unemployment rate is supposed to be a proxy for. But we have other figures that already measure peoples’ material conditions pretty well–the poverty level, f’rinstance. On the other hand, we don’t have any very good figure to tell us the strength of the private labor market.

Here’s my core problem with including relief jobs in the unemployment rate: the unemployment figures start telling you as much about the political situation as the underlying economy. The government can push the unemployment level down to nearly any arbitrary level it wants by putting anyone without a job on the dole and making them do some not-very-valuable task in order to cash their check. Just as you can push GDP up by the simple expedient of borrowing money (which does not show up in the GDP figures) and having the government spend it, you can lower unemployment by borrowing money and spending it on creating jobs with a value too low to justify creating them in the private sector.

But ultimately, the health of the economy relies on the ability of the private sector to generate growth, and the private sector to generate jobs. It’s the tax revenue from that growth, those jobs, that allow the government to create government jobs. In the short term, the government can borrow and spend, but if the private sector and the labor market are not growing, eventually lenders will get worried about the ability to repay and raise the interest rates they charge. Result: well, there are a lot of deposed Latin American heads of state who could describe the result in some very vivid language.

If we include relief jobs in the unemployment figures, we lose track of the strength of the underlying private labor market that has to ultimately support those jobs.

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Because of the immense scope of the Stimulus Bill and others to follow, it is going to be very easy for each side to claim they were proved right. Liberals obviously have the ability to fudge the numbers in their favor. Conservatives are going to be looking for ways to point to failures. That is natural. What i would like to see though is if we could all agree on some kind of compromise way to measure success when these programs are up and running. Hopefully that would prevent at least some of the inevitable disagreements over analysis that will be in our future.