Liberty Street Economics (the New York Fed blog) writes:
The employment-population (E/P) ratio frequently is used as an additional labor market measure. The E/P ratio is defined as the number of employed divided by the size of the working-age, noninstitutionalized population. An advantage of the E/P ratio over the unemployment rate is that it is not impacted by discouraged workers who stop looking for employment. The E/P ratio also dominates a measure focusing just on total employment in the economy, since it adjusts for changes in the size of the working-age population. The chart below shows the E/P ratio since 2001. The gray shading represents time periods when the economy was in a recession. Over the Great Recession, the E/P ratio (red line) declined by 4.1 percentage points relative to the average of the E/P ratio over the prior expansion (blue line). Since the end of the recession, the E/P ratio has largely remained constant—that is, virtually none of the decline in the E/P ratio from the Great Recession has been recovered to date. An implication is that the 7.6 million jobs added since the trough of employment in February 2010 has essentially just kept pace with growth in the working-age population.
In its failure to recover, the E/P ratio would seem to depict a much weaker labor market than indicated by the unemployment rate. An important question is whether this is a correct or a misleading characterization of the degree of the labor market recovery. While the E/P ratio is not affected by discouraged workers, it still is impacted by changing demographics in the economy. The employment rate profile over a worker’s career has an inverted U-shape, with rising employment rates until a worker reaches her mid-30s to mid-40s, then leveling off and declining in her 50s with sharp drops at 62 and 65. The effect of population aging on the E/P ratio depends on the distribution of individuals in the economy across the rising and falling sections of their career employment rate profiles. The earlier observation that no progress has been made in closing the E/P gap opened up by the Great Recession assumes that, in the absence of the recession, the E/P ratio would have remained relatively constant at the level indicated by the blue line in the chart. However, it is important to check this assumption by estimating the impact of changing demographics on the E/P ratio.
And they do. After crunching 10.2 million data points they conclude:
We have argued that the E/P ratio is a misleading indicator for the degree of the labor market recovery. However, the normalized, demographically adjusted E/P ratio is a useful additional gauge of labor market conditions. It is important to control for changing demographic factors when looking at the behavior of the E/P ratio over time. This step is particularly important today when these demographic factors are exerting downward pressure on the actual E/P rate, suggesting that the recent lack of improvement in the E/P ratio does not imply a lack of progress in the labor market. The adjusted E/P rate corroborates the basic picture from the unemployment rate that the labor market has been recovering over the past few years, but that it still has a ways to go to reach a full recovery.
It would give me a big headache just to imagine having to crunch 10.2 million data points (maybe Mark Sadowski would lick his lips in anticipation!). But anyway, there´s a simple (much simplified) way to get a view of the present day labor market, and that´s by using the employment rate of the 25-54 age group (which is adjusted for changes in the relevant population).
This is the picture that comes up.
In the picture JR stands for “Jobless Recovery”. Note that prior to the 1990/91 recession, jobs started to come back as soon as the recession ended. Not so thereafter. And more, the loss of jobs increases from cycle to cycle because it takes longer after the recession ends for jobs to come back.
After the 2001 recession (which was ‘short and shallow’ in terms of real output losses), employment comes back only slowly and never regains the previous peak. OK, the 00s were a long way from the booming 90s.
But in this cycle the loss has been enormous and there´s been no V shaped recovery in employment. In fact, there´s no indication that it will climb back towards the previous rate.
Maybe the fact that Bernanke left over a depressed economy (see here) mostly explains this fact, with “average is over” and “job polarization” being mostly ‘rationalizations’ of what is deemed the “new normal”.
HT M C Klein