A James Alexander post
I showed in the previous post how the Bureau of Labour Statistics (BLS) has quietly shifted its expected drop in the LFP rate forward by several years to fit with observed drop in the rate. At Historinhas we argue that this much earlier than expected drop is due to the neglect of NGDP leading to inadequate Aggregate Demand.
RGDP growth was likely to slow due to demographic factors, but gently over the next 15 years – other things being equal. By “other things being equal” I specifically mean no secular changes in innovation or supply-side reforms that would boost productivity. The growth in the labour force was always expected to slow, due to lower population growth and the ageing of that population leading to a lower Labour Force Participation Rate (LFPR), especially the large baby-boomer cohort. Assuming inflation was unchanged, the lower growth in the absolute size of the workforce would also gradually have taken the edge of the NGDP growth rate too.
The effect of the much earlier than expected weakness in the LFPR on the size of the Civilian Labour Force was partially offset by a higher than expected population pool out of which the Civilian Labour Force selects itself, or is selected.
I used some percentage numbers in my previous post but did also want to show the charts that express this BLS two-step (left and down) more clearly.
The BLS has only made three long-term projections to 2050 since the turn of the century, and at rather odd intervals. The earliest was published in May 2002 and forecast a decline in the LFPR to 61% by 2050. Most of the decline was due to occur in the twenty years from 2010 to 2030. One interim projection for 2015 gave an LFPR of 67%, suggesting the decline would only really start in earnest after 2015. There was a mild acceleration in the decline in the LFPR projected in November 2006, the second long term projection made a few years later.
However, in the next long term projection published in October 2012 the impact of the recession had brought forward the start of the period of rapid decline by at least ten years. The BLS now projected a much lower, sub-60% end point in 2050.
The bi-annual medium-term-projections only look ahead 10 years, but the same drop and leftward shift in the LFPR curve can be clearly seen. I have included the long term projection from May 2002 to illustrate the size of the early onset of the slump in LFPR from the initial, pre-recession view.
Kevin Erdmann has drawn my attention to an interesting, as ever, post he wrote back at the end of 2013 where he analysed the trends in more detail, by age cohort. He argued that the BLS was optimistic in its projections in the 2007 medium term forecast suggesting that the labour market was “very hot” back then and it was therefore a poor base year.
I am not so sure the labour market was very hot back then, and why 4.5% unemployment should be seen as full employment. Average hourly wages were only rising just over 4% YoY. It was OK but nothing special. It was more as if the developed world was at the start of a period of prosperity rather than a peak.
We are sometimes in danger of becoming conditioned to high levels of unemployment that we forget what a red hot market is really like. Even in the 1990s you couldn’t walk of out of one job and into another the next day. That lovely nirvana for workers was back in the 1950s and 1960s when you had surging labour force growth and a red hot market. It is unimaginable to today’s youth but a fact. Good stuff happens when central bankers are forced to focus on prosperity over inflation. The awful consequences of the inflation phobia at the Fed are gradually beginning to dawn on the markets.