Dec

4

There is a very timely article in the Wall Street Journal that discusses Simpson's Paradox (a form of aggregation fallacy) and other statistical myths. A brief snippet:

Is the current economic slump worse than the recession of the early 1980s?

Measured by unemployment, the answer appears to be no, or at least not yet. The jobless rate was 10.2% in October, compared with a peak of 10.8% in November and December of 1982.

But viewed another way, the current recession looks worse, not better. The unemployment rate among college graduates is higher than during the 1980s recession. Ditto for workers with some college, high-school graduates and high-school dropouts.

So how can the overall unemployment rate be lower today but higher among each group? The anomaly is an example of Simpson's Paradox — a common but misleading statistical phenomenon rooted in the differing sizes of subgroups. Put simply, Simpson's Paradox reveals that aggregated data can appear to reverse important trends in the numbers being combined.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Stefan Jovanovich writes:

There may be a simpler answer: the BLS is now using a base 12 numbering system. From the report: "About 2.3 million persons were marginally attached to the labor force in November, an increase of 376,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey."

For those who do not know labor-speak, "searched for work" is a term of art. It means that the person did not report a job search to their state Labor department. And why did the unemployed person fail to show up and tell the clerk behind the desk that they had looked for work? In most cases, it is because the person was no longer entitled to receive unemployment benefits and he or she had ceased to find any humor in reading the same stale job listings posted on the bulletin board. In California right now those receiving benefits do not have to report their job searches because the EDD (Employment Development Department - how is that for an Orwellian name?) computer system has crashed. The BLS has not yet excluded California's unemployed who are receiving benefits from the total who are officially counted as unemployed, but that may be coming soon. "Statistics! I'll show you statistics!" said the academic Federales in answer to the question about badges.


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