Morning Must-Read: Jared Bernstein: Will the Real Unemployment Rate Please Stand Up?

Jared Bernstein: Will the Real Unemployment Rate Please Stand Up?:

Let’s be conservative and say that 2/3 of the decline in the labor force [participation] rate is “fixable,” i.e., at full employment it would eventually be reversed. Then the unemployment gap is: 6.7 + (2/3 x 3.4) – 5.5 or about 3.5 ppts (that 3.4 is the drop in the labor force rate using quarterly data since its pre-recession peak).  And you will very quickly notice that 3.5 > 1.2, the latter being the naïve gap as per u – u*. One last thing.  I wouldn’t be so quick to plug 5.5 [as the natural rate of unemployment] into all those equations above.  As Dean and I argue, the NAIRU is probably biased up as well.  If you use, say, 4.5 instead that’s another percentage point of slack.

Fed chair Janet Yellen (still getting used to writing that!) knows this stuff but it’s still worth making a lot of noise about.  It’s certainly not well understood by those members of Congress arguing that the decline in the jobless rate means they don’t need to extend UI. The real unemployment rate is a good bit higher than 6.7%–forget the speedometer: we’re not going 60… we’re going 40.  So keep that foot off the brake for now.