Thursday, July 12, 2012

BLS And The Fed Are Ignoring The Variance Of The State Unemployment Numbers: Looking At Policy Effects On State Unemployment Variance Will Aid Policy Choices: Variance Would Help In Deciding The Natural Rate Of Unemployment

With North Dakota showing a 3.0 percent unemployment rate, Nevada a 11.6 percent unemployment and the entire US around 8.2 percent unemployment rate, a single unemployment number of the national average masks what is happening across the US and hinders the analysis of the proper policy response.

The Bureau of Labor Statistics needs to release on a monthly basis the statistical variance of the state and metropolitan area unemployment rates that make up the national average unemployment rate.

Policies that lower the national unemployment rate without lowering the variance means that government policies are helping the part of the US that is already doing well. Likewise, if the variances of the state and metropolitan area unemployment rates are increasing, it means that government policies are hurting some states and hindering their employment recovery while benefiting other states that are already successful in lowering unemployment.

Furthermore, a historical base of the variance of state and metropolitan area unemployment might give the Fed additional insight into what is happening and help in choosing the correct policy response.

For example, one would expect a tightening of credit to affect all employment fairly equally across the 50 states. If unemployment is increasing nationally because of tight money, one should not expect to see an increase in the variance of the unemployment rates, i.e. some states experience an increase in unemployment while other states see a decrease or no change in unemployment rates.

If the variance is increasing then, it is likely other factors are also at work that are increasing unemployment in some areas of the US while not affecting other areas. It means that action by the Fed to increase the money supply and lower borrowing rates will not be as effective as expected.

Variance numbers would also give the Fed insight into the natural rate of unemployment in the US. If there is a large variance, then the average is not near the natural rate because there are areas with much lower and higher unemployment than the average indicates. Similarly, a small variance means the entire US is close to the national unemployment rate and if there were no common factor affecting the entire US unemployment rate then the national unemployment rate is much more likely a natural rate of unemployment.

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