The recent labor market data was abysmal; 38,000 new jobs created against an expectation of 150,000 or more. Unemployment fell slightly to 4.7%, in part because the labor force continued to shrink. A lower unemployment rate is good news and, historically, 5% unemployment has been considered close to full employment. But is that the whole picture?
Chart 1: The Employment to Population Ratio
Some have claimed that we should be looking at the employment to population ratio instead of the unemployment rate. The performance of that statistic is not encouraging as is evident from Chart 1 which shows that the current employment to population ratio is 59.7%, a value that we last saw in May of 2009. That looks bad. But should we be worried?
In the dim distant past, economists focused on the unemployment rate as a measure of labor market strength. In the 1970s, a group of economists from the real business cycle school persuaded us that unemployment is the wrong measure and that we should look instead, at the hours workers by a representative person. That measure varies for three reasons. Changes in the length of the work week, changes in the labor force participation rate, and changes in the unemployment rate. The length of the work week for the average person has fallen steadily since WWII and although it goes up and down over the business cycle, the variation in average weekly hours in not the major reason for recessions. What about the labor force participation rates?
Chart 2: Unemployment and Labor Force Participation
According to a popular narrative, labor force participation is low because of 'discouraged workers'. These are people who would really like to be working but who have dropped out the labor force because they cannot find a job. What is the evidence for the 'discouraged worker'? In my view; not much.
Chart 2 shows male and female labor force participation rates alongside the unemployment rate. Try as I may, I cannot get excited about the changes in the labor force participation rates. They display secular trends that are largely explained by the aging population and by the sociology of an increase in female labor participation in the 1950s and 1960s.
Recessions are not, as some economists have argued, times when workers choose to voluntarily enjoy additional leisure. They are times when it is hard to find a job because not enough people are choosing to spend their income as opposed to saving it. If the discouraged worker effect were an important explanation of the slow recovery from the Great Recession, we would expect to see significant variation in labor force participation rates at business cycle frequencies. The fact that we don't suggests, to me, that the dismal employment to population ratio is caused by the end of the baby boom. As I argue in my forthcoming book, Prosperity for All: How to Prevent Financial Crises, this is not something that monetary or fiscal policy can, or should, be used to 'cure'.
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The first version of this post incorrectly posted the employment to population ratio for 25-54 year olds. I have updated it with the civilian employment-population ratio.