Why did the U.S. unemployment rate used to be so low? (and why it can be very low again) asked Regis Barnichon and Andrew Figura (Adapted choosen excerpts by Job Market Monitor to follow)
Between 1979 and 2000, the unemployment rate displayed a secular decline of about 2 ppt and reached 3.8% in April 2000, its lowest value in the last 40 years. This secular decline in unemployment since the early 1980s can be attributed to two, and only two, main forces:
- the aging of the baby boom and
- a decline in willingness to work, captured by a decline in the fraction of inactive individuals at the margin of the labor force.
The component of unemployment driven by hiring and layoffs displays little evidence of a trend. Since labor demand based of unemployment trend should have affected the hiring and layoff components, the author conclude that labor demand based explanations are unlikely in their current form.
However, hiring and layoffs account for most of unemployment fluctuations at business cycle frequencies. The U.S. labor market thus seems to be characterized by a trend-cycle dichotomy, in that different forces seem to drive the cycle and the trend.
The author find that the downward trend in unemployment since the early 80s (about -2 ppt) is driven by:
(i) demographics, i.e. the aging of the baby boom generation, which lowered the unemployment rate by about 1ppt and
(ii) a secular change in the composition of the inactivity pool, and more specifically, a downward trend in the fraction of marginally attached individuals since the mid 90s, which lowered unemployment by about 3/4 percentage point.
These forces are still present today but are masked by an exceptionally low (and likely transitory) labor demand.
Source and full text @:
Job Market Monitor 
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