A hell of a coincidence!

Scott Sumner goes back once again to the Labor Force Participation Rate:

Back in 2013 I argued that the low Labor Force Participation Rate was not evidence of lots of labor market slack:

It’s true the payroll gains and falling unemployment rate overlook the low labor force participation. In my view the falling LFPR is not a cyclical issue, even though the variable is itself cyclical.  This is very confusing to most people.  Imagine a LFPR that has a strong downward trend for structural (non cyclical) reasons.  Also assume the actual LFPR falls in a more cyclical pattern, falling steeply during recessions and leveling off during booms.  The level periods look like “nothing happening,” whereas the LFPR is actually growing relative to the declining trend line.  My prediction is that the LFPR will stay low even after we recover from the recession, and we always recover from recessions.  It’s not a cyclical problem.  This will become obvious by 2016.

Last October I explained the point further:

I noticed that the labor force participation ratio fell to 62.7%, the lowest rate since February 1978. Folks, it’s not coming back.  In less than a year the recession will completely end and we will get a normal unemployment rate (about 5%).  Jobs will be available and those people simply aren’t coming back.  They are early boomer retirements (perhaps discouraged by the previous job market), disabled (perhaps partly discouraged by the job market in previous years) and young people staying in school longer, or choosing to work less (as is true in affluent towns like my own Newton, Massachusetts.)  It pains me to say this but it’s pretty clear they aren’t coming back—the job market is good enough where the LFPR rate should not still be falling, if it really were nothing more than discouraged workers sitting there ready to plunge in again when things got a bit better.

To minimize “problems” associated with demographic factors (early retirements, staying in school for longer, etc.), I consider only the prime working age group (25 – 54 years).

Scott says: “Imagine a LFPR that has a strong downward trend…”. That is simply not the case for the 25-54 LFPR. The strong trend was up all the way to the end of the 1980s, getting stronger in the 70s and 80s with women increasingly joining the labor force.

Notice also the almost imperceptible cyclical movement of the LFPR during the recessions, and that remains mostly true even after the upward trend peters out after 1989, becoming flat, indicating a “steady state” level for the LFPR.

The Employment/Pop ratio for the same age group shows much more cyclicality, being significantly affected during recessions. The trend also disappears after the end of the 80s and all the movements become cyclical around a “steady state” level of the E/P ratio.

Not coming back_1

Then, something very “unusual” happens; that being the large and potent drop in AD (NGDP). What else could quickly take both the LFPR and the E/P ratio to levels seen more than 30 years ago?

Not coming back_2

For the past year or so, the E/P ratio shows signs of picking-up. Maybe we will see some upward movement in the LFPR. Probably not much, at least since the economy remains “depressed” as defined by the much lower level of NGDP that has been a fixture of the post crisis environment.

As I called it earlier, the macro-foundations of the economy “cracked”. The consequences are not good, including sentiments such as those expressed by Scott: “It pains me to say this but it’s pretty clear they aren’t coming back…”


5 thoughts on “A hell of a coincidence!

  1. There is no reason to stop at just using total 25-54 year olds. The data is easily available for each age group, by gender. If you look at males 25-34, 35-44, and 45-54, separately, there are quite linear long term trends going back decades, with some cyclical movement. Those series look nothing like the humped graph you get when you combine age groups and genders, because the hump is generally the result of movements between age groups and of long term non-linear female trends.

    • Kevin, I didn´t underatnd your comment in light of the post´s purpose, which was simply to show an “incredible coincidence”. I didn´t get what you called “humped graphs”. Actually, a point to be investigated is the conjecture that the US economy, in some dimensions, reached a “steady state” around the end of the 1980s. This came up also in the house stock/population: https://thefaintofheart.wordpress.com/2012/10/27/the-housing-boom-financial-crisis-the-great-recession-3/

      • I agree with you that the NGDP crash is important, and it created a cyclical drop in employment, no doubt. But, it just has nothing to do with the long term trend or with how LFP compares to 30 years ago. One clear piece of evidence about this is that the changing LFP trend disappears when you disaggregate it by gender and age. In the male series with narrow age ranges (10 years or less), recent trends don’t look any different than they have for 60 years. The shapes of those time series are totally different than the shapes of the aggregate series or even the 25 to 54 year old series you show here. Because the long term trends in the 25 to 54 year olds are dominated by the maturation of women entering the labor force and by age shifting of the population.

        And the effect of an NGDP crash when LFP is trending down 2% a decade looks a lot worse than the same crash when LFP is trending up 2% a decade.

      • BTW, your posts on housing were some of the early pieces that changed my view on that. I fully agree that we didn’t have a bubble, we just had a bust. One of the damaging things the Fed continues to do is to believe the bubble narrative, so that I suspect, if they ever allow the housing industry to breathe again, they will again be determined to kneecap the economy when they decide that home prices are too high.

        Building on my POV on the topic based on posts like the one you link to above, I have noticed that current core inflation is well below 1% if you remove shelter inflation. Shelter inflation is high because the Fed has created a supply shortage in housing. So, even now, the concentration on inflation is confusing monetary policy.

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