Tuesday, June 27, 2017

US Unemployment Low or High

I keep getting this question of low unemployment numbers of US reported in the media, whereas I say there is high unemployment in the US.

So first the point form answer.

a) What the media reports is U3 from the Bureau of Labor and Statistics (BLS). U3 are those unemployed and participating in the labor force, i.e looking for a job.

b) There is also a measure called U6, which is supposed to measure all unemployed.

c) Both U3 and U6 have issues because both use a model, birth death (of companies) to get all the U numbers.

Birth Death Model of Jobs
The biggest problem in the reported U statistics is the Birth Death model. By some estimates, 93% of the "jobs created" and "40% of jobs" (2016) are from the birth death model.  To quote "On the contrary, all data on establishment births and deaths point to an ongoing decrease in entrepreneurship."
 The birth death model originated in the biological sciences (Copula Models). The model is also used in pricing Credit Default Swaps (CDS).  (I used to code this stuff)

The basic idea being,
 i) get a estimate of how many companies at a particular credit rating (eg AAA) lose their credit rating within time frames (trees)
ii) Use the above info for probabilities of a company (or basket) to loose their Credit Rating. Then price the CDS.

As you can see just the estimates can be problematic. Slight tweak and you get the numbers you want.

 So the caveat, when you read that the economy added more jobs, note that it was from a model (not a two legged one), a math model.