Stop “employing” unemployment

Economists waste too much time “employing” the unemployment rate concept.

Oh boy..

The unemployment rate.

Do we really have to go all over this again?

Why are people continuing discussing about Full Employment? The natural rate of unemployment? NAIRU?!!?

Economists sound like those annoying children yelling during the trip (the economic recovery):

– Are we there yet? Are we there yet?

No. We are not.

Forget about the theory that says if the unemployment rate is below the “natural rate” we must have inflation. It´s not incorrect, it’s only half true. The NAIRU story is incomplete.

The NAIRU story states that if inflation isn’t rapidly increasing, the unemployment rate must be above the natural unemployment rate.

However, I believe the United States most probably has the unemployment rate below its “natural” ratio, the one that pushes wages up. When workers increase their bargaining power. Yes, the Phillips curve story, Marx’s reservation army, …

Just look at the data, we are seeing one of the lowest unemployment rates recorded (since the hippies).

United States Unemployment Rate

But…that does not mean, we are already there.

Just look at the data, the US has suffered a big decrease in employment since the Crisis and its still a great deal behind the curve.

United States Employment Rate

The Labor Force Participation is still recovering.

United States Labor Force Participation Rate

Of course, some part of the decrease in participation is due to demographics…

But, in my opinion, we must probably watch this sequence of events in the proceeding recovery, a convergence to the natural rate of unemployment combined with low inflation from (drums…) BELOW:

  1. As the economy expands and the unemployment rate contracts, more people that were out of the Labor Force will return as they perceive an increase in the demand for labor
  2. The rise in the participation rate will lead mathematically to an increase in unemployment and/or employment
  3. As long as the ratio of the increase in unemployment to the increase in participation is lower than the official unemployment rate, the Unemployment rate will continue to decrease (just do the math)
  4. But eventually it will come a time when the increase in participation will not totally be reflected in new employment and the inflection time will initiate
  5. The unemployment rate will start to increase (but the employment rate is also increasing (remember?), as the participation rate is increasing)
  6. Eventually we will reach a ratio of employment which will cause pressure on wages
  7. We will start to see the “white in the eyes” of inflation
  8. Finally the Federal Reserve will definitively remove the “punch bowl” by pursuing a contractionary policy
  9. Will we have a recession next?
  10. Are we there yet?