Arnold Kling

Daughter of Lucy

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In August of 2003, I wrote about my preferred economic indicator, which I called a labor capacity utilization index, or LUCY. I want to update it.

Back then, I used an index of aggregate hours worked, which I assume meant only for production and nonsupervisory workers, since that is the only historical series I can find when trying to update it (there is an index of hours worked by all workers, but it only goes back five years). Even though the BLS has a very generous definition of such workers, in a Garett Jones economy I would rather look at everyone. So for my update, I changed to using total nonfarm payroll employment. Incidentally, this includes government workers.

So here is, if you will, daughter of LUCY. You take total nonfarm payroll employment and divided it by the population over 16. (This is basically just an employment to population ratio.) Divided each monthly number by the peak value, reached in December of 1999, then multiply by 100. The resulting index behaves as follows:

It has a peak of 100 in December of 1999, obviously. However, the NBER recession does not begin until March of 2001.

It has a trough of 93.66 in December of 2003. The NBER had declared the recession as ending in December of 2001. My original LUCY article was written to dispute this view, just as I currently dispute the NBER end date for the most recent recession.

The next peak is 95.26, in April of 2006.

The next trough is 87.51, in December of 2009.

Its recent high is 87.97 in May of this year, and it is currently at 87.56.

Some remarks:

1. If daughter of LUCY were the only indicator we were using, we would say that the most recent recession began in May of 2006 and perhaps ended in December of 2009. The NBER says that the recession did not begin until December of 2007 and it ended in June of 2009.

2. The NBER uses many indicators, and it places a great weight on GDP. GDP is the dominant measure of economic activity in the spending paradigm. I think that market utilization of labor ought to be the dominant measure in the PSST paradigm.

3. If we use the daughter of LUCY as our measure of economic activity, and we use the peak-to-peak difference as a measure of the secular trend, then from December of 1999 to April of 2006, the secular change was -4.64 percent, which is a significant decline.

I think that labor capacity utilization is the right way to measure economic activity. It says that economic activity has been in a declining mode for most of the past ten years. Relative to that decline in economic activity, GDP has done remarkably well. That says that productivity growth has been fairly rapid.

To me, this looks like economic restructuring. Many workers have lost jobs because their contributions are not valued by employers. Entrepreneurs need to figure out business models that can profitably employ the available workers.


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CATEGORIES: Macroeconomics



COMMENTS (12 to date)
Bob Knaus writes:

Alternatively, there was a 4.6% increase in preference for leisure from 1999 to 2006.

Wouldn't we expect, in an increasingly productive society, that more people would choose not to work? Granted, that's not a story to be found in the media, but to that I say "Squeaky wheels and revealed preferences."

Silas Barta writes:

Brilliant analysis, Arnold_Kling. This is an excellent identification of the appropriate metrics (given our limitations) of economic health in the sense that we actually care about, and it highlights things we should worry about -- like the peak-to-peak drop.

And sadly, it confirms my suspicion about a lot of the supposed economic growth of the last ten years being fake, and standard-of-living metrics being biased upwards from reality.

medwards writes:

Shouldn't it be LUCI?

Keith writes:

I would read your data as an indication that investment has not kept pace with population growth. According to BEA data, gross private investment peaked at roughly 18% of national income in mid 2000 and the next peak was early 2006 at around 17% of national income. Using BEA estimates of capital consumption, net private investment peaked in mid 2000 at around 8% of income and again in early 2006 at around 7% income. (Note net private investment was near zero for most of 2009.) We are simply not investing enough to fully utlize our labor force.

Play around with the linked simulator to explore possible affects of growth in population, money supply and government spending with capital accumulation, income and employment.

http://forio.com/simulate/simulation/keubanks/macro-economics-101

david (not henderson) writes:

A suggested modification (granddaughter of Lucy?) might be to use population over 16 but under 65 as your denominator. It might correct for an aging population.

Ray Byers writes:

You can find a modified version of Arnold's LUCY here.

Chris W writes:

You talk about Keynesians mistakenly thinking of the economy as a GDP factory, but this seems even worse. Thinking of the economy as a GDP factory incentivizes the government to spend money in order to increase GDP to "restart" the economy, but if we only paid attention to aggregate hours or nonfarm payrolls as a percent of the population, then the government would be even more incentivized than they are now to hire more people on their payrolls in order to claim an "economy recovery" (or in turn I guess they could also keep the population/immigration down). I think it would be a disaster if something like the LUCY index were to replace GDP as our main indicator of macroeconomic health. That being said, I do agree that "jobless recoveries" aren't completely legitimate recoveries.

Salem writes:

I can't believe I'm going to disagree with you on economics, but...

LUCY is (at least in theory) an interesting piece of data, but why is it your preferred economic indicator? After all, jobs are a cost, not a benefit. Moreover, LUCY would surely be a better economic indicator if you believe we are all "workers at the GDP factory" - I simply don't see how it squares with your PSST viewpoint, where labour is not easily interchangeable.

If we are in a "Garrett Jones economy" and productivity is rising fast, then that must mean that human capital is being eroded at a high rate, as PSSTs change. It's creative destruction. Some workers are able to maintain their human capital as their specialisation adapts - for example, a surgeon learning new techniques can keep up to speed. But for others their specialisation collapses and they suffer a dramatic loss of their human capital - for example, people working in the manufacture and design of watches. You might have spent years acquiring and developing those skills, but through no fault of your own watch sales have crashed, and now many of your skills are useless and you need to acquire new ones to be able to find gainful employment. That's hard. You may be ZMP for a while.

Surely combining PSST ideas with fast productivity growth implies that "recalculation" is constantly going on, not just during recessions. That means LUCY is a measure of the difficulty of the matching problem at any one time. But it is not a measure of economic activity in a PSST model, because it says nothing about the value being created by the PSSTs - which is what a PSST theory would say we should care about. LUCY would say that economic activity is greatest when everyone is a subsistence farmer - or when the government tells the unemployed to dig ditches and fill them in. She prefers fixed (or declining) productivity to creative destruction. She's a caricature Keynesian - in fact, she's a Luddite.

In a PSST paradigm, surely the right way to measure economic activity would be some kind of "quality of life" index. Which, I agree, is hard and subjective, but is at least an attempt to measure the right thing.

Blogospheroid writes:

I agree with salem, jobs are a cost. Also, if the long term technological unemployment story has even a reasonable probability of becoming true, then we should not be focussing on jobs at all, but on income coming to indivduals.

My preferred economic target (which is what all indicators eventually become) is [sum of dividends to the median adult citizen minus percapita expenses]

This is just a modification of the standard formula used for measuring financial independence. Dividends coming to you should be enough to pay your expenses. The closer we are to that for all citizens, the better society is. Let the machines do the grunt work, let the humans do whatever they want.

Sean writes:

Can you include the graph in the post?

Henry writes:

Indeed, I have always known that the labor market is always last to turn with any given economic condition. As we hear of recessions ending, it is still interesting to see the jobless numbers continue to rise and cause issues.

Rebecca Burlingame writes:

Arnold,
Salem stresses the incidental nature of human capital in GNP and further notes, "LUCY would say that economic activity is greatest when everyone is a subsistence farmer." There's a reason for this unfortunate conclusion. Both indicators are still measuring by money valuations, and what money captures is value of exchange, rather than value of use. How is it possible to ascribe all human labor to value of exchange when the exchange becomes devalued in relative terms? This is why I have been working on a value of use model which - rather than being devalued by comparison to the optimal use of labor that money captures - happens person to person. Example, the labors of a 65 year old person may not be suitable for a job match. However that labor could be perfectly suitable for match with a 60 year old. The interior match - to them - good as value of exchange, even though it is only use.

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