Why is the unemployment “rate” called a rate?

Its so much fun to accuse a Nobel Laureate of getting basic economics wrong. Paul Krugman confuses levels with rates.

The unemployment “rate” is the number of unemployed divided by the labor force. This is not a rate in the rate vs. levels sense. Its a level. Just like the real money supply is a level, the unemployment “rate” is a level. It has just been normalized.

Suppose there’s a bathtub with water flowing out through a leak and water flowing in from the facet. The water level is constant if the amount of water poured in is the same as the amount poured out. You will notice, though, even if the water level is constant the water itself is not. In such a dynamic system, eventually all the water will be replaced by new water. The water level tells us nothing about that.

The number of unemployed is like the water level in the bathtub. There’s always newly unemployed workers being poured into the unemployment tub and there’s always workers leaking out when they find jobs.

Ryan Avent (somehow people discovered the true identity of The Economist blogger) and Paul Krugman are wringing their hands over the slow pace in the reduction of the unemployment during recoveries. Similarly, Brad Delong is always talking about a “jobless recovery”.

But do high unemployment rates mean people can’t find jobs? No. This is like suggesting that because a bath tub is full there’s no leak. Would you pat a plumber on the back and tell him “good job” because he “fixed” the leaking problem by turning on the facet?

Despite the headlines and the breathless way some bloggers write about it, people don’t care about the unemployment rate, they care about whether or not people are finding jobs.

From the JOLTS data, it looks like unemployment in this recession is being driven by an unusually low hire rate (firing rates are more or less the same as normal). Suppose the recession ended and the job finding rate immediately resumed its usual, non-recession value. How long would it take for the unemployment rate to get from the current 9.8% to normal levels? Doing the math, it would take about nine months. On the other hand, if it takes about a year for the hire rate to get back to its normal values, we wouldn’t see normal unemployment rates for a year and a half. So the longer it takes for the hire rate to get back to normal, the longer it will take to see normal unemployment rates.

That last sentence might have seemed obvious, but consider the implications. With improving hire rates, the average amount of time spent unemployed would be dropping. This answers Avent’s questions about the political economics of persistent unemployment. If people are finding it easier to find jobs, they’re less likely to throw fits in the ballot box, no?

Also it suggests we shouldn’t care much for how fast the unemployment rates get back to normal after recessions.