- Registration time
- Last login
- Online time
- 976 Hour
- Reading permission
11 September 2014.|
The official US unemployment rate is 6.1% vs. a Great Recession high of 10.0% and a low of 4.4% during the last expansion. So what do we make of that number? Although the jobless rate has fallen a lot, so has the labor force participation rate. The LFPR was 66% before the downturn, down to 62.8% today. So a much smaller share of adults are either employed or active jobseekers. If the LFPR were back at its prerecession level, the jobless rate would be 10.7%.
But that doesn’t mean the “real” jobless rate is nearly 11%. Economists generally agree that half of the roughly three percentage point decline in the LFPR decline is due to more retirees. America is getting older. That adjustment alone gives a jobless rate of 8.3%.
So the big question: what portion of that remaining 1-1/2-point drop in the LFPR is due to other structural factors and how much is due to a cyclically weak labor market that discourages jobseekers?
If the latter is a big factor, then (a) the official 6.1% jobless rate really understates the true weakness of the labor market, and (b) faster economic growth — say, from continued easy monetary policy — would draw people back into the labor market. But if it is the former, then we are getting close to full employment (somewhere, the Federal Reserve guesses, between 5.2% and 5.5%) and thus getting a more robust labor market requires dealing with longer-term structural changes in (a) the labor force participation of teenagers, young adults, and less-educated prime-age adults and (b) retirement and disability rates.
So short-term cyclical vs. long-term structural: which is it? A new note from Goldman Sachs gives some perspective on the state of the debate. It explains that a new Federal Reserve staff paper concludes that according to its preferred economic model, cyclical weakness was currently depressing the participation rate by just 1/4 of percentage point. In other words, almost all of the LFPR decline since 2007 is due to either demographic or structural factors.
But Goldman disagrees, and sees the cyclical “participation gap” as larger and more significant (bold is mine):
Last week, a group of six Fed staff economists–including William Wascher, a deputy director of the Division of Research and Statistics– published a new study on the labor force participation rate. The paper concludes that “much–but not all–of the decline in the labor force participation rate since 2007 is structural in nature.” Based on this assessment and other recent studies, a number of commentators have concluded that the participation debate has been settled in favor of the “structural” view. …
The new Fed staff paper concludes that cyclical weakness was depressing the participation rate in 2014Q2 by ¼pp in its preferred (cohort-based) model and up to 1pp in an alternative model based on state-level data. While the Fed paper provides a comprehensive study of the issues involved, we believe that its estimates of the participation gap are best interpreted to lie around the upper end of the ¼-1pp range cited in the study. …
This interpretation would make the Fed staff’s estimates more consistent with other recent studies … While more recent estimates of the participation gap have tended to be somewhat smaller, the median estimate is roughly 1pp, broadly consistent with the upper end of the Fed staff paper’s summary range. While that estimate suggests that cyclical factors account for less than half of the decline in the participation rate, it would mean that the participation gap constitutes just over 1.5pp of the labor force (as opposed to the 16+ population), roughly double the Fed’s 0.75pp estimate of the U3 unemployment gap implied by the Summary of Economic Projections. The participation gap, therefore, is hardly a negligible factor in estimating remaining slack/ Or, in other words, we still have ways to go before hitting full employment, at least at a level permitted by the current structure of the US labor market. The “real unemployment” — if you buy the Goldman analysis — is probably about halfway between the 6.1% number and the 8.3% number, about 7.5% or so.
And, of course, this only concerns job quantity, not job quality. There are still too many part-time jobs as a share of total employment (see below) and too many of the middle-wage jobs lost during the Great Recession have been replaced by low-wage jobs.