Abbott and Costello explain unemployment

The unemployment rate tends to understate how many people are actually out of work

A PREVIOUS POST looked at the reasons why the reported unemployment rate in the USA tends to understate the “real” unemployment rate.

To understand why this happens, here are a few equations which show how the formula for the unemployment rate is derived:

Looking at the equations above you can see that the unemployment rate measures the percentage of the “labour force” which is unemployed.

The labour force is equal to the number of employed and unemployed people. However, a person is considered to be “not in the labour force” if he or she is not working and has not looked for work for a certain period of time. As a result, that person will not be taken into account when computing the unemployment rate.

This means that if a lot of people have dropped out of the labour force (i.e. they would like to work but have stopped looking for work) then the unemployment rate will understate the percentage of people in the population who are actually out of work.

As the financial crisis in the US continues, and the sovereign debt crisis in Europe worsens, the disparity between the reported unemployment rates and the “real” unemployment rates for these countries is likely to increase.

To help explain the unemployment issue more clearly, here is an amusing (and hopefully enlightening) explanation brought to you by Abbott and Costello.

COSTELLO: I want to talk about the unemployment rate in America.

ABBOTT: Good “subject”. Terrible “times”. It’s about 9%.

COSTELLO: That many people are out of work?

ABBOTT: No, that’s 16%.

COSTELLO: You just said 9%.

ABBOTT: 9% Unemployed.

COSTELLO: Right 9% out of work.

ABBOTT: No, that’s 16%.

COSTELLO: Okay, so it’s 16% unemployed.

ABBOTT: No, that’s 9%…

COSTELLO: WAIT A MINUTE. Is it 9% or 16%?

ABBOTT: 9% are unemployed. 16% are out of work.

COSTELLO: If you are out of work you are unemployed.

ABBOTT: No, you can’t count the “Out of Work” as the unemployed. You have to look for work to be unemployed.

COSTELLO: But … they are out of work!

ABBOTT: No, you miss my point.

COSTELLO: What point?

ABBOTT: Someone who doesn’t look for work, can’t be counted with those who look for work. It wouldn’t be fair.

COSTELLO: To who?

ABBOTT: The unemployed.

COSTELLO: But they are ALL out of work.

ABBOTT: No, the unemployed are actively looking for work…Those who are out of work stopped looking. They gave up. And, if you give up, you are no longer in the ranks of the unemployed.

COSTELLO: So if you’re off the unemployment roles, that would count as less unemployment?

ABBOTT: Unemployment would go down. Absolutely!

COSTELLO: The unemployment just goes down because you don’t look for work?

ABBOTT: Absolutely it goes down. That’s how you get to 9%. Otherwise it would be 16%. You don’t want to read about 16% unemployment do ya?

COSTELLO: That would be frightening.

ABBOTT: Absolutely.

COSTELLO: Wait, I got a question for you. That means they’re two ways to bring down the unemployment number?

ABBOTT: Two ways is correct.

COSTELLO: Unemployment can go down if someone gets a job?

ABBOTT: Correct.

COSTELLO: And unemployment can also go down if you stop looking for a job?

ABBOTT: Bingo.

COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to just stop looking for work.

ABBOTT: Now you’re thinking like an economist.

COSTELLO: I don’t even know what the hell I just said!

Sh*t happens: a birds eye view of economics

THIS is a very humorous and instructive (albeit PG rated) overview of economics.

Here are the super-summary notes:

1. Microeconomics: The price of sh*t is determined by supply and demand.

2. Macroeconomics: Oh, sh*t!

3. Keynesian economics: Sh*t happens because of animal spirits.

4. Neo-keynesian economics: This sh*t is sticky.

5. Neo-classical synthesis: Sh*t happens in the short run but not in the long run.

6. Behavioural economics: This sh*t is irrational.

7. Austrian school: Sh*t happens because of the fractional reserve banking system.

8. Pareto Improvement: Taking my sh*t is okay when I don’t give a sh*t.

9. Goldman Sachs: How did we end up with all this sh*t?

10. Greg Mankiw: You can read about this sh*t in my favourite text book!

The Transmutability of Desire

Desire can change from one object to another

YOU are most likely familiar with the marketing adage, “Sex sells”.

The concept is a fairly simple one. Sex is a topic of interest because humans have a biological and instinctive desire to reproduce. This hard-wired desire is exploited by marketers to attract people’s attention and, at the same time, market whatever they are selling.

An interesting feature of sex in advertising is that there is often no relationship between the images used (e.g. a buxom young woman) and the product being sold (e.g. an energy drink).

If there is no logical connection between the images and the product, then how does sex actually help sell the product?

There are two ways to think about the influential power of sex in advertising.

1. Gaining attention

Provocative images attract attention. This helps marketers sell products because it is difficult to sell a product that everyone ignores. That being said, just because people see an advertisement doesn’t mean that they will be convinced to buy the product.

Getting attention is only the first step.

2. Arousing desire

Using sex in advertising can help to stimulate desire in the minds of consumers. You might think of desire as a strong feeling of wanting to have something or wishing for something to happen. A man who sees a picture of a buxom young woman might desire what he sees.

For women, attraction is often based on different criteria like commitment, trust and social status. And so, an advertisement aimed at women might look like the one on the left.

The question is, if a marketer can stimulate desire for one thing (e.g. romance on horseback), how does that help the marketer create desire for something completely unrelated (e.g. Ralph Lauren perfume)?

Making a person desire one object can lead them to desire another unrelated object due to the principle of “desire transmutation”. Desire exists in the mind of consumers. Products themselves are not inherently desirable. You only have to look at Apple products from the 80’s to see that products which people believed were desirable at the time are no longer desirable. Each time Apple launches a new product, the Apple marketing machine (and previously the influence of the great Steve Jobs) swings into full gear to fan the flames of desire in the minds of its loyal customers.

Since desire is a state of mind, once a marketer creates desire in the mind of a consumer, this desire can easily be changed from one object to another, from one product to the next. This is the principle of desire transmutation. And it explains why the desire for a buxom young woman can sell energy drinks, and the desire for romance on horseback can sell expensive perfume.