Wanted: More Unemployment

It is bad news for the American economy that the unemployment rate fell in November. Yes, you read that correctly: We need higher unemployment.

As I’ve noted repeatedly in recent months, the unemployment rate is an odd measuring stick for the health of the labor market. It basically tells us how many people are looking for work. It falls when people get jobs, which is good. But it also falls when people stop looking for work, which of course is not so good.

In recent years a lot of people have given up on looking for work. As a result, the unemployment rate has gradually declined from 10 percent to 7 percent even as the share of American adults who are working has remained basically steady.

Source: Bureau of Labor Statistics

It’s easier to see the trends if you skip over the government’s wacky data for the month of October, and compare November with September. The number of people that the government counted as unemployed fell by 348,000, driving the unemployment rate from 7.2 percent to 7.0 percent. But the number of people with jobs only increased by 83,000. In other words, for every person who found a job between September and November, three other people stopped looking.

Explanations for this problem fall into two categories, both depressing.

The first school holds that the economy is broken: We have entered an era of “secular stagnation.” We must resign ourselves to a smaller work force.

The second school holds that the government is broken. There are steps we could take to grow faster but, for the most part, we are doing the opposite.

This sounds more promising, but some subscribers to the second school add an important caveat. They warn that as time passes, problems that could have been fixed calcify into enduring realities. People who might have returned to the work force fall back on disability benefits, or simply begin to lose necessary skills.

One of the most striking examples of this phenomenon is a 2008 Swedish study that found unemployed people experienced a gradual deterioration in literacy.

So these explanations may, in time, converge. The economy will have suffered permanent damage. But there will at least be the comfort of knowing the unemployment rate, once again, is an accurate measure of what’s possible.