The US Federal Reserve's decision last week to undertake a further programme of monetary base expansion - quantitative easing - without a defined end point, is being viewed by some as a fundamental shift in US monetary policy.
The Fed has a specific dual mandate focusing on inflation and unemployment. However, many would argue that the inflation target has taken priority. Yet, at the press conference Chairman Bernanke put much more stress on unemployment than in his press conference in January. But as Gavin Davies points out the change in Bernanke's position
... is not because the expected path for unemployment has worsened since January. Surprisingly, the path for unemployment in the FOMC's September projections is almost exactly identical to that published in January, if not a little lower.
The reason for the shift is, according to Davies, because of a worsening in the underlying unemployment problem. Davies contends that Bernanke is concerned about shrinkage in the labour force as people have left the labour force having given up on prospects of getting a job. But also people leave if they are unemployed long enough because their work skills atrophy and may even disappear. Economists call this problem: hysteresis, a concept pioneered by my colleague at Strathclyde University, Rod Cross see here.
Of course, if people lose their job and then eventually leave the labour force, then they also leave measured unemployment too.
In other words a deteriorating unemployment problem, to which Bernanke and Davies refer, will not be (fully) picked up in the published unemployment data.
This is evident in Scotland during the Great Recession and recovery because the numbers inactive in the work force have steadily risen as the chart below shows.
The chart indicates that since the start of the recession there has been an upward rise in the numbers inactive. There is a strong upward trend. However, a closer look suggests that the upward movement largely came after August - October 2009. That is after measured unemployment had risen from 117,000 to 185,000, see next chart. In other words, it appears that people began to leave the labour force only after a considerable spell of unemployment, or several short spells.
So, by May -July of this year, the numbers inactive had risen by more than 51,000, or 3.4%, since the start of the recession.
One caveat might be that population ageing might see growth in the numbers inactive. But the change noted here does appear to be more recession related than demographic. Though, clearly, there is scope for more research on this.
If we assume that the Scottish labour market was in equilibrium at the last pre-recession peak (or low in unemployment terms), then we can add back in the rise in the increase in the numbers inactive in each successive quarter. This allows me to compute a new measure of unemployment, which might reasonably be said to be a more 'real' measure than the measured rate. The Labour Force Survey asks if people looked for work in the last month. If not, they are assigned to the inactive category. But they may have stopped looking for work if they feel there is no prospect of a job.
On this calculation unemployment in Scotland peaked at 270,000 or 10.1%, instead of the official measure of 240,000, or 8.9%. And even on the latest data, 'real' unemployment is more than 40,000 above the measured number, a rate of 9.5% rather than 8.2%.
There are two key conclusions. First, unemployment is higher than the official measure. Secondly, the official measure of unemployment fails to give an accurate measure of the scale of labour supply and the degree of human suffering engendered by the failure to secure a job.
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