The trap of missing labels

As I have explained before, there are solid reasons to apply statistical adjustments to data. But what should worry us is the practice of not labelling adjusted data as such. For example, the unemployment rate commonly referenced does not count so-called "discouraged" workers; the inflation rate excludes so-called volatile components, such as gas prices; a lot of economic statistics are seasonally adjusted.

Missing labels presents an easy trap of drawing conclusions as if the data were unadjusted. For instance, we frequently hear people explain away bad unemployment numbers in the fall by seasonal reduction in summer jobs. This makes sense if the unemployment numbers were not seasonally adjusted. The seasonal adjustment already accounts for the effect of summer jobs so that explanation doesn't fly.

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So, today I saw this piece by Gregory White (on Business Insider) in which he makes this claim:

The San Francisco Federal Reserve just released a report that suggests the natural rate of unemployment in the U.S. (also sometimes called NAIRU) is going up and may actually be 6.7%. That means, relying on last month's 9% unemployment rate, we're only 2.3% away from the natural rate.

This interpertation has always bothered me -- and if there are economists reading this blog, maybe you can tell me if I make sense here.

The natural rate of unemployment seems to account for those "unemployable" people, people who don't have the right skills, cannot find a job, are not willing to work at the prevailing wage level, etc. To me, the unemployment rate of 9% as typically reported (not the U-6 number) already excludes these types of workers. So, you can't do 9% - 6.7% and claim that our gap is 2.3%. In fact, our gap is almost all of the 9% because the adjustment already takes care of the "natural" rate.

Comments

[Morgan]

The NAIRU is defined as the rate of unemployment (U) at which expected inflation (I) = 0 (all other potential causes of inflation/deflation ignored). If the method of computing unemployment changed so that unemployment was expressed in units U*, the NAIRU would have the same meaning, but U* would not = U.

[Arandomwalk.blogspot.com]

this might help. Nairu and the natural rate are not the same thing.

http://www.frbsf.org/econrsrch/wklyltr/wklyltr98/el98-28.html

And no the UR doesn't adjust for structural unemployment etc...

[Kaiser]

Arandomwalk: thanks for the link. It clarifies how economists think about the "natural rate". I'm not sure what you mean by "UR does't adjust for structural unemployment"; are you talking about U6? My understanding is the 9-10% the media reports excludes workers who don't want to work, who give up looking for work, etc.

[trexbi]

Natural rate of unemployment corresponds to what you would expect to see if market's were frictionless, i.e. that people who are in the job market would be only unemployed voluntarily (e.g. searching for the right job).