Why Alan Krueger's Jobs Analysis Was Spot On: The Ticker

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By Paula Dwyer

In a March 31 Bloomberg News op-ed, Princeton University economist Alan Krueger predicted that the unemployment rate, then at 8.9 percent, would keep falling. He was wrong -- it rose, and five months later it's still higher at 9.1 percent.

President Barack Obama today nominated Krueger to lead the Council of Economic Advisers, replacing Austan Goolsbee. Did the president choose someone who doesn't understand labor markets?

To the contrary. In the same op-ed, Krueger's analysis was spot on when he wrote about the employment-to-population ratio, which may offer a better window on job-market trends. As Krueger explained, the unemployment rate can be illusory because it only counts people who have actively looked for a job in the last month. He wrote:

"Here’s something to think about. At the end of this year, extended unemployment benefits will expire, while other people will exhaust their benefits during the course of the year. Once that happens we might start seeing more people give up looking for work, restoring the pattern where people unemployed the longest leave the labor force at a higher rate than others. After all, the prospect of finding a job after looking for two years is small, and it probably won’t improve much even if the labor market continues to heal.

So we might well see the labor force shrinking more even as the measured unemployment rate falls. Nonetheless, we still will have a serious joblessness problem even as the unemployment rate falls.

Instead of focusing on the unemployment rate, it may be better to look at the employment-to-population ratio, or the share of the population that is employed. This rate isn’t affected by whether someone is counted as in or out of the labor force.

Tellingly, the employment-to-population rate has hardly budged since reaching a low of 58.2 percent in December 2009. Last month it stood at just 58.4 percent. Even in the expansion from 2002 to 2007 the share of the population employed never reached the peak of 64.7 percent it attained before the March-November 2001 recession.

What this indicator tells me is that we weren’t creating enough jobs long before the recession that began in December 2007. If this pattern holds, even in recovery, it points to a much deeper and disturbing problem for the U.S. economy."

He was right: The employment-to-population ratio kept on slipping in subsequent months, reaching 58.2 percent in the June payrolls report and 58.1 percent in July. As my colleague Mark Whitehouse wrote in an Aug. 5 Ticker post, that's the lowest point since the 1983 recession. We'll see if it dips below that, to 58 or even lower, when the August employment figures are released on Friday.

(Paula Dwyer is a member of the Bloomberg View editorial board.)

-0- Aug/29/2011 22:16 GMT