My one thought on the jobs report

Having actually looked at the data, as opposed to just the headlines, my one thought now is the same I had on payroll Friday.

The US is at full employment – or is indistinguishable to me from being there. In this post, I review my evidence for that, which is not deep but I think gets us into the right ballpark. And then I talk about a couple of the implications. None of this is particularly new. The jobs report just provided some additional confirmation of what I figured was the case. A good Bayesian updater prolly wouldn’t do much. And, contra the tone of what I express below, he also wouldn’t be too cocky.

Before rounding, the unemployment rate ticked up from 4.65% to 4.72%, and not just because of a spike in the participation rate. Rather, the employment population ratio actually fell marginally, which meant that the imputed “household survey” measure of employment growth was reported at just 63k.  Still, the headline unemployment rate remains marginally below the CBO’s estimate of the natural rate, which is 4.8%.

There is a fun discussion to be had about what the natural rate really means and the possibility of multiple equilibria, but I won’t get into that here, beyond mentioning that so far as I can tell that discussion doesn’t really take you anywhere practical.

If you casually assert multiple equilibria, you can go a lot of places. So I think one would have to elaborate a bit beyond saying multiple equilibria and then going home having won. For now, as a best guess, I am going to assert that the onus would be on those who insist they know we are not at full employment.

A separate argument here is that the low unemployment rate is merely a fiction created by the collapse of the participation rate since the crisis. For example, Trump’s new swamp-draining head of the National Economic Commission, Gary Cohn, says that it is a fun fact that the unemployment rate would be 11% were it not for the decline of the participation rate delivered on net under Obama.


There are two points to make about this fun fact. First, it is not factual. If you do the arithmetic right the number is 9%.  For a big shot like Gary Cohn, it probably seems quibbling to worry about the decimal or the last digit or well the first digit. He operates at the higher level.

More to the point, why do we assume that the decline of the participation rate is purely cyclical and involuntary? Maybe it is, but it seems to me that the consensus among disinterested people who have looked into this is that the decline in the participation rate is mostly non-cyclical and that we are effectively at full employment.

For example, a Bloomberg article on Friday updated some work done by former Fed economist, Andrew Levin, and former BoE MPC member, David Blanchflower showing that the employment gap had effectively closed. So far as I can tell the employment gap is just the “product” of the deviation of the unemployment rate from its natural rate and the participation rate from its potential rate.

Not that it matters, or that or that Levin and Blanchflower are influenced by such things, but those two gentlemen can hardly be described as hawks.  Separately, I have not tried to replicate the calculations made by the Bloomberg analyst. For now, I am taking it on faith. (Duly warned.)


As a proudly partisan liberal (what the else would you be in this shit show?), I like how the guy annotates his chart to show that things are good when the GOP gets in and then shitty when the Dems get in. That was the author’s point or at least focus.  My point is that the distance from the last observation to the horizontal line is pretty small.

There remains, I suppose, the issue of those working part-time for economic, presumably cyclical, reasons.   I do not have much expertise to offer on that beyond pointing out that the broad measure of unemployment, U6, includes those people and looks a lot like U3, once both are scaled relative to their typical mean and cyclical volatility. Maybe there are some people who are discouraged but claim otherwise.  Possible.

I don’t think I am smart enough to identify that the US is now at something other than full employment.  And I don’t think you are smart enough either. How about we just focus on the big picture: we are probably pretty close to full employment.


So it seems like an awfully odd point in the cycle for policy makers to be dreaming up news ways of “stimulating” the economy, particularly through fiscal policy. Where we you Kuh-neazians in 2010 or 2011? *  I have made my own views on that pretty clear. See, for example, here and here. So I won’t belabor the point further.

I have to assume that many (not all) of the people making the case for continued significant labor market slack are engaged in motivated reasoning. Some people just want tax cuts and to ignore their effect on the deficit, and use the idea (ill-timed as it is) of stimulus as cover for that.

And there there’s the Failure Caucus, comprising equity bears, right wingers, inflation nutters and other grumps, speaking as grump myself. They were upset at what they perceived to be policy makers wrecking a perfectly good and well deserved Depression and they want their hard times (for other people) back!

For whatever it is worth, which is not much, I view these guys as having a pretty harmless view on the equity market these days. The two mistakes they make, by my lights, cancel one another out and gets them to a conclusion that I can’t say is wrong. If you are going to argue from the wrong premise, make sure you do so incoherently. Otherwise you are guaranteed to be wrong!

Anyhow, first, they wrongly say that there is a lot of spare capacity left in the labor market. And then they backwardsly assume that high unemployment, even once achieved, is bearish for equities. Following the analogy that a negative number multiplied by a negative number is a positive, I figure they are positively right directionally. I ain’t that excited about equities here either.  My approach here is mostly to express my ignorance and Zip It!

Of course, not everybody who disagrees with my take on this is falling for motivated reasoning. Some sincerely believe  that the participation rate is cyclically depressed and that too many people are working part time.  Maybe they are right and I am wrong. As petulant potus might say, “and some are good people.”

I just don’t think the odds are currently on their side. And they have a lot of company from the motivated reasoners, I think.

* I have been doing a lot of reading on behavioral finance in recent years. Currently, I am working through Michael Lewis’ The Undoing Project.  It is an excellent read and makes me so envious. So far, the new new thing I have learned from it is that the philosophical pragmatist’s aversion to essentialism is huge in psychology too. Stay away from crude classifications, like — for example — “massively stimulative” or “white.”  The great thing about behavioral finance is that it allows you to identify all the stupid mistakes OTHER people make.  I am myself totally immune from those influences.

A very smart guy whom I quite liked from back at the hold shop used to pronounce it that way. Kuh-neazian.  It took me a couple months to figure out what he meant. I sorted that under  judge people on whether they get stuff right, not on how they express themselves.  That too is in Lewis’ new book.  Don’t ask if what they say is true. Ask instead what it is true of. Awesome. That student of Kuh-neazian economics is 100 times as rich as I am, which I mention not because I keep score that way but because he does. Fine by me.

Lewis tells the story of how the original students of decision making within psychology accepted the economists’ standard view that people were mostly rational in their choices and, more to the point, information processing.  The prevailing view prior to Kahneman (who convinced Tversky) was that people’s failure to do proper Bayesian updating was evidence that they were “conservative Bayesians.” Rather, than say not Bayesian and therefore irrational, they said “conservative Bayesians.” This floored Kahneman who wondered, what is wrong with you people?!

This is self-serving, anchored, myopic, overconfident and suffering from confirmation bias. But I think the idea that monetary policy has been “massively stimulative”, despite all evidence to the contrary, suggests that macro policy analysis is in many cases stuck where psychology was in the 1950s.

The new fangled Fisherians make that point, claiming that low interest rates deliver low inflation, ultimately.  My take is more paleo-Keynesian. If you you are at liquidity trap, monetary policy is prolly not too stimulative. What are the odds the Fed’s choice of interest rate to go with really stimulative would just happen to be the zero bound? Also, what is wrong with you people?!