Friday, July 04, 2003

War is Peace

Elaine Chao trumpeted the high unemployment rate as a sign that the economy is in recovery. Why? Well, because the labor force grew by 600,000 in June. To some degree it´s a change in the denominator which is driving the increase.

Using logic that only a Real Business Cycle theorist could love, dear Ms. Chao has determined that all of those people are re-entering the labor market because of renewed economic opportunities.

I´ve always had fun mocking real business cycle theory, which can be described simply as claiming that all unemployment is purely voluntary and recessions are caused when small decreases in wages due to external factors cause people to voluntarily leave their jobs. When wages are lower than normal people choose to enjoy some leisure time, figuring they´ll go back to work when wages are higher.

Actually, during this downturn I gained some new respect for RBC theory. In my sphere I´ve seen one member of two-earner households use the soft economy as a reason to, say, have/raise children, or pursue a more independent (less lucrative) endeavour of some sort.

But, people burn through their savings (or, borrow 110% on their inflated house price) pretty quickly. And, while it is true that people re-entering the labor market is driving the changes in the unemployment figures, anyone who has picked up the classifieds knows that it isn´t renewed economy opportunity that is driving them there - they´ve spent their savings and maxed out their equity and credit cards and it´s time to find a job before the bank takes their houses.

The numbers support my personal observations - women, the traditional primary caregivers, are swarming back into the labor force. 415,000 women 20 and over started pounding the pavement again in June.