The Vanishing U.S. Labor Force

 

It’s one of the biggest questions in economics right now: To what extent is the big and sustained plunge in America’s labor force participation rate — from 66% pre-recession to 63.3% now – attributable to demographics (such as an aging population) vs. cyclical factors (a weak demand economy). If it is the former, then the 7.6% unemployment rate is an OK gauge of the current health of the US labor market — could be better, but improving.

But if it’s the latter, then the “real” unemployment rate — one taking into account millions of discouraged job-market dropouts — is markedly higher. The WaPo’s Jim Tankersley: “By misreading the trends in participation now, policymakers might gain a false sense of security about the state of American job creation.”

With all that in mind, Labor Force Participation and Monetary Policy in the Wake of the Great Recession, a new study from Boston Fed economists Christopher Erceg and Andrew Levin, has a worrisome finding:

Our paper provides compelling empirical evidence that cyclical factors account for the bulk of the recent decline in the labor force participation rate (henceforth LFPR). … More specifically, our analysis of state-level employment data indicates that cyclical factors can fully account for the post-2007 decline of 2 percentage points in the LFPR for prime-age adults (that is, 25 to 54 years old).

1. The Fed needs to pay close attention to the labor force participation rate as a threshold for judging the success or failure of its bond buying program. The unemployment rate is giving a misleadingly rosy signal. (And I would prefer the Fed target NGDP rather than job metrics.)

2. That being said, given the weak LFP rate, the Fed should continue to be aggressive — if not more so — in its monetary easing. As Erceg and Levin write, “The monetary rules developed for the Great Moderation period may have to be adapted to account for broader measures of slack.”

3. The Fed should be aggressive even if the unemployment rate overshoots its so-called natural rate and inflation ticks up:

A key result of our analysis is that a monetary policy can induce a more rapid closure of the participation gap through allowing the unemployment rate to overshoot its long-run natural rate (i.e,. unemployment falls below the natural rate).

Quite intuitively, keeping unemployment persistently low draws cyclical non-participants back into labor force more quickly.

Given that the cyclical non-participants exert some downward pressure on infl‡ation, some overshooting of the long-run natural rate actually turns out to be consistent with keeping in‡flation stable in our model. However, a more aggressive strategy of employment gap targeting boosts in‡flation –at least to some degree –by requiring unemployment to remain lower for even longer. Thus, there is some tradeoff between stabilizing in‡flation and broad measures of resource slack that include participation.

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  1. Profile Photo Inactive
    @Tuck

    I understood that a lot of the people who are dropping out of the unemployment statistics were going on the Social Security Disability rolls, which is why those rolls have skyrocketed.

    “…since the economy began its slow, slow recovery in late 2009, we’ve been averaging about 150,000 jobs created per month. In that same period every month, almost 250,000 people have been applying for disability.”

    http://lfb.org/today/hiding-the-unemployed-disability-and-the-politics-of-stats/

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  2. Profile Photo Inactive
    @user_646399

    Not an economist, I am likely a barbarous economic relic and skeptic of central economic planning, especially vast and unprecedented monetary interventions. It may be simplistic, but I tend to look at incentives which motivate individual human actions. Most people who have worked a few years – particularly in large enterprises – have had the opportunity to observe varying responses of fellow employees insofar as their desire to work productively. Some were shirkers and were carried by the rest; many of those are now ‘disabled.’

    In developed countries, not many generations past, most of the population worked for subsistence. Not working was not an option. Retirement was not an option. A few generations later it seems that the existence of non-productive individuals is merely taken for granted and those who produce support those who do not, for whatever reason they do not work.

    I lack understanding of the assumptions and workings of economic models. Might it simply be that we have created too many incentives to not participate in the labor force and insufficient incentives to work and to do so as though one’s life (and one’s family’s lives and one’s community’s lives) depended on it?

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  3. Profile Photo Member
    @Larry3435

    I don’t think the Fed will need to worry that its penchant for printing gobs of money is going to drive the unemployment rate too low any time soon.  All of this quantitative easing isn’t doing a damn thing to stimulate the economy, and there is no reason to think it ever will.

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  4. Profile Photo Inactive
    @user_646399

    The plunge in the labor force participation rate began in the first year of Obama’s first term. Is it the first result of the ‘fundamental transformation of America’ he promised? 

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  5. Profile Photo Coolidge
    @ChrisCampion

    Bernankie printing $85 billion on a computer in the Fed is not going to create the conditions where investment (real investment in capital projects, not equities investment) happens.  The low rate is nice, propping up reserves and paying interest on it to banks is what some might describe as obscene.

    “Easing” has happened repeatedly.  GDP growth rate is stalled and has been for years now.  Labor is dropping out of the market entirely, for a number of reasons, and this keeps the unemployment number not looking quite so horrible.  Inflation rate is low but does not include other market basket goods that we consume every day – like gas – which would make the real rate much higher.

    So I’m still waiting to be convinced that more of the same is a Great Idea.  Until I see some data that shows otherwise, inflating the equities markets seems to be the goal of Bernanke, but to what end I do not know.  

    The DJIA is not the economy.

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  6. Profile Photo Coolidge
    @FakeJohnJaneGalt

    I always thought that the labor force participation rate was just the flub number used to manipulate the unemployment number to political advantage. I never made a big deal about it since if they did not use a flub number they would have to go out and disappear people to get the numbers where they want them.

    • #6
  7. Profile Photo Member
    @Larry3435

    It depresses me a little bit that cultural issues get so much attention from the Ricochetti, but economic issues get a few comments and then get ignored.  The economic catastrophe we are living in is going to be the end of America, and thereby are the end of civilization.  That seems to me to be more important that whether some gay folks get married, but hey – under Shari’a law there won’t be any gay marriages so it’s kind of a wash.  Right?

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  8. Profile Photo Inactive
    @Valiuth

    Is there away to calculate what the natural decline due to demographic changes in the labor force? That is the key as you mention. So untill we figure that out aren’t we just speculating about the meaning of the unemployment numbers?

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  9. Profile Photo Inactive
    @Tuck

    “Forget the Unemployment Rate: The Alarming Stat Is the Number of ‘Missing Workers'”

    http://www.nationaljournal.com/domesticpolicy/forget-the-unemployment-rate-the-alarming-stat-is-the-number-of-missing-workers-20130503

    • #9

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