Academic Literature

US – The trend employment-to-population ratio has been falling for over a decade Chicago Fed finds

The labor force participation (LFP) rate—the share of the working-age population that is either employed or jobless and actively looking for employment—has fallen from 66 percent at the beginning of the Great Recession in December 2007 to 62.7 percent in September 2014.1 To some, this decline suggests the possibility that there may be labor market slack over and above that captured by the unemployment rate. The existence of such extra slack might imply that it would be appropriate for mon- etary policy to remain highly accommodative for longer than would otherwise be the case. However, to properly judge the extent to which the drop in the LFP rate reflects additional slack, one must account for the effects of several long-running trends not associated with the latest recession. Such pre-recession trends include the movement of baby boomers into retirement ages, long-running declines in the labor force participation of males of prime working age (25–54), the flattening out of once-rising female participation, sharp declines in teen participation, and the increasing participation of adults aged 55 and older. All but the last trend imply that a decline in aggregate LFP was to be expected even before the Great Recession began. Indeed, after rising from the 1960s through the 1990s, LFP has been falling since 2000, reflecting most of these factors…

The results from our models suggest that there may indeed be greater slack in the labor market than is signaled by the unemployment rate…

While evolving demographics (particularly those related to the large baby boom generation approaching or entering retirement) have been the focus in much of the recent discussion on the decline in LFP, we want to emphasize that long-running secular changes in work participation decisions within demographic groups have been an important part of the story as well. To show this more clearly, we plot in figure 9 a trend LFP rate that holds the age-sex groups’ population shares fixed at their 2007 levels but allows the group-specific trend LFP rates to vary over time as predicted by our model. This demographically adjusted hypothetical trend LFP rate is still moving down between 2007 and 2013, highlighting that there are factors besides an aging population at play.

Capture d’écran 2014-12-30 à 08.54.21

Figure 15 shows the implication of our trend LFP and natural rate of unemployment results for the trend employment-to-population ratio. As the figure shows, the trend employment-to-population ratio has been falling for over a decade because of the drop in the LFP rate. The value of the trend employment-to-population ratio using the CBO’s short-run natural rate of unemployment (blue line) is 60.5 percent in the third quarter of 2014—about 1.5 percentage points greater than the actual BLS data (orange line). Relative to the trend employment-to-population ratio using the adjusted hypothetical trend unemployment rate described in the previous paragraph (green line), the actual ratio is 2 percentage points lower in the third quarter of 2014.

Capture d’écran 2014-12-30 à 08.59.28

Chosen excerpts by Job Market Monitor. Read the whole story at Declining labor force participation and its implications for unemployment and employment growth


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