Wednesday, September 22, 2010

Civilian Capacity Utilization Index, a modification of Arnold Kling's LUCY

Since Arnold Kling believes we're still in a recession he's updated and modified his capacity utilization index, LUCY, which he now calls 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.
He prefers this as a means of identifying recessions, as opposed to the official NBER dating methods. This peaked my curiosity, and induced me to create my own index, the nephew of LUCY. I went to the BLS and took the Employment status of the civilian noninstitutional population 16 years and over, and created an index that is similar to Arnold's except that it uses yearly averages and civilian employment instead of monthly averages and nonfarm employment (which includes noncivilian employment). Here's what the data look like:

For Comparison, here's GDP and recession data from FRED2:

Arnold concludes:
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.

Looking at the two graphs above I would quibble with his view of economic activity. If we exclusively focus on the employment to population ratio to determine economic activity then all the massive productivity gains that have been made in the past century will be invisible to us.

Having gainfully employed citizens is important for the overal health of the country, but by itself the employment ratio tells us little about the agregate productive capability or output, and does not sufficiently inform us on the health of the economy.

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