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Economists: Major Problems in Fed Unemployment Study

By    |   Wednesday, 05 February 2014 12:07 PM

The labor market is stronger than most people think, concludes a new paper by New York Federal Reserve economists.

The economy is not as bad as the low employment-to-population rate suggests, assert New York Fed economists Samuel Kapon and Joseph Tracy. The E/P ratio, which dropped over 4 percent from almost 63 percent to about 59 percent during the last recession and has yet to recover, implies that the economy is not as healthy as the falling unemployment rate indicates since discouraged workers are not counted as unemployed if they stop seeking work.

The Fed economists argue that the E/P ratio is misleading. It's dropping because of the large numbers of baby boomers entering their 60s and retiring.

Not so fast, others counter, saying there are huge problems with the study.

New York Times columnist Paul Krugman writes that it's the Fed study that is misleading, saying their argument was "sort of smuggled through the back door."

The Fed economists reached their results by concluding the economy was overheated before the recession with unemployment abnormally low.

"What this does is in effect build the Lesser Depression into your definition of normal," Krugman writes.

According to their model, the early Bush years were not depressed but were overheated most of the time, he states, saying they performed a "de facto reinterpretation of history."

If the labor market was overheated before the recession, inflation pressures would have been rising, he argues. Instead, they were falling.

The Fed study "ignores the actual data we have on employment by age group," writes Bloomberg columnist Matthew C. Klein. "Americans 55 and older didn’t lose their jobs during the recession to the extent that younger ones did. In fact, the proportion of older Americans with a job is higher now than in 2006, partly because it is harder to retire than in the past when asset prices were high and rising."

Workers in their late 30s and early 40s have recovered only about a third of their jobs from the pre-crisis peak, and those 45 to 54 have not made gains since the recession, Klein says.

The Huffington Post views the study as potentially dangerous. "It will almost certainly be read closely by Fed Chair Janet Yellen and other people with the power to move interest rates and the economy," writes Mark Gongloff for the Huffington Post. "Are they willing to bet the recovery on it being right?"

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The labor market is stronger than most people think, concludes a new paper by New York Federal Reserve economists.
Wednesday, 05 February 2014 12:07 PM
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