Pethokoukis, Economics, U.S. Economy

The vanishing US labor force: New study suggests jobless rate is misleadingly low

050113jobs

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.

18 thoughts on “The vanishing US labor force: New study suggests jobless rate is misleadingly low

  1. I guess some folks still see a “mystery” in the fact that this precipitous drop in the LFPR started with the advent of the 110th Congress’ policies and the P-O-R (Pelosi-Obama-Reid) Economy (h/t Tom Blumer).

    Associated with that mystery is the silly idea that the Fed can fix this by pumping more unusable liquidity into a collapsing economy.

    Cyclical vs. Demographic is a false choice. The reason for the downturn is obvious to anyone: government policy that is openly hostile to every level of the private sector.

    I just don’t get why people are tiptoeing around these facts with terms like “suggests”, etc. The U3 rate has unquestionably been a lie for years now, as are the currently reported inflation rate (distorted by eliminating the commodities that drive the real inflation felt by the consumer) and GDP (which is distorted by massive federal deficit spending and the FED’s QE).

  2. Liberals simply don’t believe in the demand curve viz. if you you raise the price of labor you’ll get less demand for it.

  3. Please read “America’s Great Depression” by Murray Rothbard (intro to 5th edition by Paul Johnson) and consider Austrian School insights. Fed targeting NGDP is more of the same central planning that produced the Great Recession.

  4. I agree with goy. QE3 continues to rob retirees and savers of their accumulated wealth for the benefit of the spenders who see no need for a nest egg. Until unemployment benefits and other government handouts are pared back, the non-working public will remain idle.

    The ECB has Cyrus banks forcibly seizing new taxes on bank accounts. The US Fed has accomplished the same task by massively lowering interest rates since well before the onset of the Great Recession.

  5. People respond to incentives and economic conditions, specifically the massive expansion of the welfare state under Obama, and the Great Recession, causing older people to remain in the workforce longer.

    http://mercatus.org/publication/long-term-unemployment?utm_source=facebook&utm_medium=fbpage&utm_campaign=chart&utm_content=LaborForceParticipation

    The actual current unemployment rate is around 13 – 14% (12% just using a 65 long term LFPR), and if you strip out the bullshit 1994 manipulations under Clinton, it’s pushing 20%.

    This economy is shockingly bad, and is being made worse by piss poor economic policy, as others have observed above.

    • Well mesa this is rather depressing…

      Testimony before the Joint Economic Committee – Keith Hall: This spending, called Government Social Benefits to Persons, is estimated every quarter by the Bureau of Economic Analysis. Their data shows that American households now have an unprecedented dependence on these government programs. A remarkable 17.2% of total household income now comes from government social benefits, and such spending tracks pretty closely to the jobless rate (the share of the working age population without employment) [see Graph 4 below]

      I wonder how much of that might be fraud?

      Seemingly all these federal ‘pander to parasites‘ programs are rife with fraud

    • Thank you for your post and the link for some important information. I highly agree with you statement. Why can’t we get paid decent wages so we do not need government programs to support us. I am still looking for work but I refuse to get foodstamps because at 51yrs old I am seening the fall of this economy hurt us more and more each year. It’s a shame how our older citizens have to work just to afford to eat and get medication when they should have the luxury their parents had and be retired with a pension for which they worked hard to get. And yes, that unemployment rate you stated is more towards the truth than what is being told to us. Please read my comment I posted just a few minutes ago.

      Thank you again,
      Kim

      • Kim, I’m sorry for your situation, but you implicitly understand that government is causing the problem, and that government advocates are attempting to obscure this fact.

        I am fighting them. They will lose.

  6. I personally know they keep lying about the unemployment rate is dropping. I have been unemployed since last July and I live in Florida. At a meeting with the re-emplyment counselor (that is what it is called here) the counselor told a group of us that the numbers are misleading and that once your unemployment runs out you drop out the of unemployment system which gives a false positive as if you are now employed. Also, the jobs that are out there are paying far less than they did a decade ago. Most people who are working are making from minimun wage to $10.00 per hour forcing them to have to work two jobs to sustain the cost to support themselves and a family. And that is especially true for married people with children making both parents work two jobs. As an Apartment Property Manager (the type of work I have done for the past 13yrs) I have seen first hand how the decline in income is hurting people in America. It is harder now for families to pay the rent and afford daycare and food. Even in my field my job paid $50k a decade ago when now your lucky to get $35k.

    • One other destructive aspect of the lies being told about the U3 rate are that people hear one thing from the media and then directly experience something completely different, which can have a very negative psychological impact.

      This can be devastating for someone who’s just spent 8 years in school to get a PhD – because the conventional wisdom was that a more advanced degree leads to better employment opportunity – only to find that one can’t find a job. In some cases can’t even get a company to respond about an application for a POSTED job, as they’re literally getting thousands of applications.

      Since the lies coming from the media and the government are always falsely claiming some degree “recovery”, the likely (if often unstated) conclusion is that the individual herself/himself is of less value than all those others who are apparently the ones getting the jobs. Depression is a likely result. In reality, almost NO ONE is getting a job who doesn’t already have one. That government and the media don’t openly acknowledge this is simply shameless.

      • Wow another GREAT analogy full of truth…I just wish we were in on these so called “surveys” that are being recorded. But why would they use us? We would tell the truth and they do not want that…

        • Not just an analogy, unfortunately.

          I know at least two people in precisely this situation. I doubt they’re the exceptions to the rule for people in their position. They have decided it’s they, themselves who are at fault for being unemployed for two+ years, and don’t see it as a symptom of our Democrat-destroyed economy.

          • I am so sorry that these people are blaming themselves. I hope they read these atricles and posts we are so they can redirect their thoughts. They are just good decent people who want to support themselves, my prayers are with them.

  7. Aside from the premise that unemployment is under-reported, this article is such utter bullshit that my first instinct is to wonder about the agendas of those who write such things. Surely such commentators are intelligent enough to understand what is going on here. It is so obvious that only people who are not academic economists can see it.

    Of course the employment statistics are gamed. The real U3 and U6 numbers are frighteningly high, and without policy changes, will only increase from here. To attribute the true, abysmal state of employment and the economy to cyclical factors is a bold lie. To suggest that further action by the Fed can do anything to improve the situation through monetary policy is profound stupidity revealing an utter lack of appreciation for the economy as a system. I find it stunning that at no point in the article is any connection made between the explosive expansion of enrollment in transfer programs and the current state of employment participation.

    There is almost no dialog anywhere in our nation about the root causes of this terrible state of affairs, or the huge misalignment between today’s policies and our assumed or stated goals for these policies. A casual look at the results our current policies are obtaining should be enough to alarm us all deeply.

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