Bonddad's recent diary An Economic Chicken and Egg Story accurately documents that the rate of unemployment is a trailing indicator of economic recovery. That is, one should not expect to see the unemployment rate go down before economic activity has been increasing for some time. In short, GDP must go up before the unemployment rate goes down. That is correct and Bonddad has the graphs showing its validity in historical terms. Are there, however, other employment measures that provide indicators of what is going on in the economy right now?
That is the subject of an interesting post by John Judis (h/t yglesias) that while arguing for another round of stimulus suggests that overall employment (that is, how many people are in the work force) and average hours worked provide valuable insight into the real state of the economy.
I'll dig a little deeper across the fold.
On the number of employed:
But while the rate of unemployment may be a lagging indicator, the number of employed has actually served to be quite a good predictor of economic recovery over the past century. For example, as the 1990-91 recession was starting to reverse, the percentage of unemployed people rose--but so did the number of employed, which grew by about one million workers from March 1991 to June 1992 as a result of more people entering the workforce. In that case, the number of employed was not a lagging indicator, but rather a fairly good indicator that recovery was afoot. [Italics in original; bolding is mine]
While the number of people looking for work may keep the unemployment rate high even after economic recovery begins, the actual number of people employed grows right along with the economy thus providing a real-time indicator of increasing economic activity.
On the average hours worked:
Harvard economist Jeff Frankel...argu[es] that if you want to use employment figures to gauge economic recovery, you should look at the total hours worked rather than at the number of employed, because [at] the beginning of a recovery businesses are likely to increase production by getting their employees to work overtime, or by raising them from part-time to full-time, rather than by hiring new workers. Frankel notes that increased work hours correlated with the beginning of recovery for both the 1990-91 and 2001 recessions.
Employment itself is a less reliable statistic than the utilization of those employed. Many businesses for a variety of reasons delay laying off workers as long as they can as business declines just as they delay rehiring when business begins to pick up. The number of hours their employees work is the slack in the system on each side of this equation.
Unfortunately, by either measure the current economic downturn has yet to hit bottom. As Judis notes, the number of employed has fallen since December of 2007 and the average hours worked dropped in May despite the slowing rate of unemployment growth, a statistic that was widely used to argue recovery is on its way. Per Judis, Frankel notes that the average hours worked is at its lowest point since 1964.
Throughout early 2008 analysts backed by the hearty cheers of the Bush administration were arguing that the economy which begin to contract in December 2007 was not in recession. Now, in the still sinking depths of that recession, analysts are quick to point to any statistic that might suggest the recession is ending while dismissing those that don't as trailing indicators.
While the interpretation of the cited statistics may be accurate as far as it goes, there is a strong bias for predicting growth over contraction and recovery over decline that may well lead to poor policies that discount current suffering at the expense of merely hoped for improvement.