What a Lagging Indicator Looks Like

The unemployment rate, as you’ve probably heard, is a lagging indicator. But there are lags and then there are lags. One of the most worrying things about the current economic situation is that in recent recession the lag has been loooooong. Take this chart from Brad DeLong about the last recession:


Brad says, “A recovery in which unemployment is higher two years later than when the recovery began is not much of a recovery. And I don’t see what is going to keep the probability of such an eventuality low.”

I think the theoretical issue here is that as time passes, and growth happens, and technology progresses the labor market gets more advanced and more specialized. In general, this is a sign of good things happening. But the more advanced and specialized the economy becomes, the more difficult it is to make structural adjustments quickly. And when pulling out of a big recession, that’s a big problem.