Jared Bernstein is saying that the unemployment rate is actually higher than 6.7%…
“Based on numbers I’ve written about in greater detail, I think a more representative rate would be about 9 percent.”
His reasoning is based on the fall in labor force participation. But I do not agree with his logic. 6.7% is a realistic unemployment rate. The people who have dropped out of the labor force are gone. The economy is not as good as it used to be. And they have found alternatives. Mr. Bernstein is living in a delusion of the past grandeur of a better economy. Just like his view that unemployment will fall back to 4.0%.
Here is a story of the Dull Party to explain the low labor force participation rate.
You give a fun party every week. You send out invitations to 55 people. So you only provide enough food, beverages and party favors for 55 people. That is your budget. Every week the 55 people show up and enjoy the party. Yet every week, about 7 other people come hoping to get into the party. Every week you have to tell them “sorry, there is no more room.”
However, you would like the extra people to have a chance to enjoy your party. So you drop some people from your invitation list that don’t seem to be enjoying the party and add some names of the people who waited outside. So next week, the faces in the party will change, but there will still be 55 guests at the part. The people dropped from the invitation list now wait outside hoping to get back in.
So week to week there is a balance where 55 people enjoy the party, and 7 people wait outside. (Stable unemployment)
But then the party starts to get dull. The food, beverages and party favors just aren’t as good as before. So, you begin to notice that every week some people get bored and disappointed by the party. So they decide to do something else, maybe go to school and study. Maybe stay home and play video games. You think this is good, because now there is room for some of those who wait outside to come into the party. They seem eager and motivated to enjoy the party. You don’t have to have as many party favors to please the new-comers.
But then you begin to notice that just 4 people wait outside the party each week hoping to get in. There used to be 7 every week. What happened to the other 3 people. Well, I hate to tell you, but your party is dull. Word is getting around that it is just not as fun as before, and the food, beverages and party favors just aren’t as good as before. There are simply less people who are willing to wait outside. And let me tell you something else. Many of the people who come to the party, are not enjoying themselves. More and more of them would love to do somethings else, but they come by obligation to their family or have no good alternative.
So every week, more and more people decide not to come back and wait outside for a space in the party. They are relieved and go do something else. They have found an alternative. Maybe they make an “informal” party amongst themselves. (Informal economy is growing. source 1, source 2, source 3, source 4, source 5, source 6… enough sources?)
The point of this story is that the low labor force participation is due to a dull economy with poor benefits. Just because 7 people used to wait outside, but now only 4 do, you cannot count the missing 3 people as still there somehow. They are gone. They have found other alternatives. The new balance has been established according to the “Fun level” of your party.
Until you realize the party is dull and start offering more food, beverages and party favors, please do not expect that 7 people should be waiting outside. You are living in a delusion of past grandeur, when the party used to be more fun.
Message to anyone who thinks the unemployment rate is much higher than 6.7%… Please wake up and realize that only 4 people are now waiting outside. The others are doing something else. You have to blame the “Dull” party. Even though the economy is making room for a few more people, the party is still not getting any better. People are still not enjoying the party. The unemployment rate of 6.7% is a realistic rate.
UPDATE: Will discouraged workers come back if the economy picks up? Yes, some will, but some won’t. I do know 2 ladies who have a house-cleaning business in the “shadow” informal economy. They both earn over $50,000 per year. And they pay their workers over $12 per hour. There is no way the economy will entice these people back. Regular house-cleaning businesses pay $10 or less to their workers.