Tag Archives: labor-force participation rate

Some finding of labor market changes

There are something interesting issues about labor market that I didn’t mentioned in my last post. Last time I talked about my guess about the reason why participation rate has been increasing in recent months. In fact, I believe those increases in participation were temporary, compares to the total downward trend of labor market participation.

From FRED, I found something more data related to this topic, below is the historical graph of different gender’s participation rates:

participation f m

We can see clearly that male’s participation rate has been declining ever since 1950, from nearly 90% to today’s below 70%. While the participation rate of female is different, is had been increasing before 2000 and stayed at 60% level until the 2008 recession. Ever since then the female participation rate started declining at the same rate as that for male, that is to say, these two lines are parallel after 2008. This is to say that same amount of female and male quitted job market over those years, so the recession has the same effect on male and female who gave up searching for jobs.

However, one remarkable thing is that female are suffered less from unemployment problem then male in this recession. The following graph depicts the unemployment rate for male and female: fredgraphWe can see that the line stands for women is always below the line for male, and the gap between two lines was maximized during the recession, so from this point of view, actually female workers were not suffered from employment discrimination in this case. Compares to male workers, female workers were far more likely to find and keep their jobs.

Beside that, I also want to refer to the actual impact of this recession on unemployment, from my point of view, this recession is far more destructive then we thought before.

As showed in the above two graphs, we can see that both female and male unemployment rate hit their historical apexes. And from the graph below: fredgdfraphthe unemployment period is extremely long compares to previous recessions. Before this recession, the average unemployment duration was about 15 weeks, however, the duration period of unemployment of 2008 recession hit astonishing 40 weeks. This is to say that in former recessions, people on average speed about 3-4 months to regain their jobs while now, they must spend almost a year to find a new job. I think this must be one main reason why we witnessed lower participation rate according to WSJ, pathetically, people lost faith in finding jobs so more chose to quit rather than stay.

So what about those who stayed in job market? Many of them who found a job actually got only a part-time instead of a full-time. From the graph below: p and fwe can see the different between 2008 recession and former recessions: in the past, the part-time unemployment rate would surpass the full-time unemployment rate, but this time we see a surging full-time unemployment rate and a very low part-time unemployment rate-far lower than full-time unemployment. So, even some people found a job, it more likely to be a part-time rather than a full-time, which suggest that he/she will earn less and has more risk to loss the job again. Also, this suggests getting jobs are not so profitable, no wonder people are quitting job market.

From the data, the labor market is far away from healthy, actually it is way more deformative than we expected.

Good news in the labor market?

Thanks to the stopped beneficial plan, we witnessed a decreasing unemployment rate ever since last December. But this can never be a good news since the true reason behind all this is more and more people ceasing to spend any effort to find a job in the labor market. As mentioned in my past post, the participation rate in labor market has been reduced to 63.2%, according to the data from WSJ.

Nearly 1.4 million people lost payments when the federal benefits expired on Dec. 28, which directly caused 347,000 people to quit the competition of labor market, according to CNN. Last Friday, the Bureau of Labor updated its latest data for unemployment rate, it seems the rate remained at 6.7% which is same as last update. The peculiar thing here is that as over 192,000 new jobs were created, there is no sign of any change in the unemployment rate, the only explanation is that more people entered job market and got average result. As mentioned by Phil Izzo in WSJ, after many months of people giving up the job search, that could be an indication more people are coming off the sidelines and back into the labor force.

However, the way I interpret this issue is not that optimistic. Below is the graph generated in FRED:

age

In the graph, the middle orange line is the total trend of participation rate, we can see that it’s been declining much (about 5%-6%) since the recession. It is clear that participation rate at age 25-54 does not changed much (about 2%-3%), and the participation rate at age over 55 has been improving even after the recession. From the graph, we can see that the main forces that dragged the total participation rate down is from the age 20-24 and age 16-19 parts. That’s totally reasonable since both the red line (age 20-24) and blue line (age 16-19) have two same characteristics: volatility and cyclicity. People at that age are mostly students, and for students their participation in job market will raise in June and July and decline in other months. We can see that the trends for both lines are in the rising cycle, this explains why we experienced a boost in job market participation recently.

Now it is clear that the situation is not exactly like what Phil thought, we can have an optimistic anticipation now because more and more student are looking for or already found their jobs. And I would say that after this July the participation rate will suffer from another loss. From the trends showed in the graph, we are still losing more and more job market participation because the main trends of both lines are still downward.

If there is any good news that even exist, it will be that those downward trends are slowing down compares to years before. We can see more update about this in the future.

 

 

 

Shedding Light on the Labor Force Participation Rate

Last Friday, February job report came with a little surprise of higher than expected job growth of 175,000 and an increase in the unemployment rate to 6.7%. The increase in the unemployment rate came from non-participants getting into labor force in last month. While we watch the FED’s move to wind down QE and plan on raising the interest rate as the economy slowly recovers, we should look at more data to see whether the recovery is bringing back the U.S. economy to the track. A recovery should bring back the economy to the long run trend.

The puzzle we see after the recession is a historically low level of the labor force participation rate. The labor force participation rate is unchanged February at 63.0%, which is the lowest in 35 years. The following graph shows the labor force participation rate (LFPR) for the total population and population from age of 25 to 54.

LFPR

It is now clear that the LFPR for the total population has been decreasing since the onset of the recession. This decrease has partially been linked to the baby boomers’ retirement since 2010. But increasing data we see is that the LFPR for the group of age of 25 to 54, the prime age workers, has also been decreasing during the recovery. For this group, retirement is less relevant to the decreasing LFPR. Therefore, we should worry that there might be a cyclical decline in the LFPR.

Timothy Dunne and Ellie Terry have recently written on the subject of low LFPR. According to them, a decrease in the LFPR for prime age workers is a key contributing factor to the low overall LFPR. They separated the effect of a change in the LFPR of each age group on the overall LFPR change. The following chart shows how change in the LFPR decomposes:6a00d8341c834f53ef019b034b7184970c-800wiin their own words on the result:

Three key results emerge. First, increases in labor force participation for the youngest age group boosted overall labor force participation by 0.075 percentage points. Second, the growing population share of the 55+ age group reduced LFPRs over the period by 0.21 percentage points, accounting for roughly 40 percent of the overall decline. Third, labor force participation for prime-age workers continued to fall. The combined within effect for the prime-age individuals (25–34, 35–44, and 45–54) reduced the participation rate by 0.28 percentage points—or a little over half of the overall decline in labor force participation. Additional declines in labor force participation were associated with the reduction in population shares of prime age workers.

In other words, we see that much of the decline in the LFPR has come from decrease in the LFPR for workers of age of 25 to 54. For this group, the LFPR was 82.5% when the recession ended; whereas it is now 81.1%. A question we should ask is whether the labor force participation rate can get back to its highest level of above 84% once the unemployment rate reaches its natural rate and the economy recovers (we should define when a recovery ends).

From the first graph, it seems like the LFPR reached its highest level at around 66%. Considering increase in retirement of baby boomers in coming years, getting back to this level of LFPR is unlikely even after a solid recovery. However, the recovery should bring the LFPR for the prime age workers back to its pre-recession level unless there are some structural factors that are reducing the rate. There is high possibility that the LFPR for prime age workers might not reach its high level as the economy recovers and the unemployment rate decreases. In this case, Christopher J. Erceg and Andrew T. Levin have suggested the  monetary stimulus policy to continue until some other labor market conditions, specially the labor force participation rate, pick up, not just until the unemployment rate drops to low level if the LFPR is still relatively low.

Forget About the Unemployment Rate Altogether

The unemployment rate might be the most looked at and talked about figure in the United States when it comes to the economy. If not the absolute most, it is certainly up there. And for what reason? The national unemployment rate is some overall number that is supposed to somehow represent the condition of our economy in general. Yet, this is not realistic because the economic conditions are different in so many places around the country, and are different among so many different groups and partitions of the population. What’s more is that even the individual unemployment rates among various locations and various groups of people don’t always tell the whole story. Let’s start with my first point, though.

The unemployment rate can be an extremely misleading figure depending on what you really care about. What really matters may be a specific location in the US, or a specific age group, or a particular race or gender, or maybe a combination of several of these characteristics. The following sequence of statistics compliments this idea exactly.

If you are a college-educated woman, your unemployment rate is less than 4%. If you are an African-American male with a high-school diploma or less, the rate is well into the mid-20s, and it is in the teens for Hispanics at that education level. If you live in Nebraska or North Dakota, there has been no unemployment crisis in the past five years, and the rate has consistently stayed below 5%. If you live in the areas hit hardest by the bursting of the housing bubble—Central California, Greater Phoenix, Las Vegas, vast swaths of Florida—or the areas decimated by the woes of the auto industry, the unemployment rate has frequently been above 10%.

If we’re even going to consider the unemployment rate at all, it should only be for specific locations or groups of people, or some combination. Seeing the national unemployment rate of 6.6% currently does not tell you anything about the percentages laid out above. The unemployment rate may have been useful from the time it was created (around the time of the Great Depression) up through the mid-1900s, but now that there is so much data out there, we must pay more attention to the details as opposed to this overall average. In order to stimulate the economy and continue to emerge from the Great Recession (and hopefully start to emerge at a quicker pace), policies need to be targeted at the groups who need the most help, as opposed to targeting the nation as a whole. Most of the issues that exist are localized, whether physically, or within a specific group of people broken out by age, race, or gender. National policies are not nearly as effective as localized, targeted ones would be.

Hari Sreenivasan and Nela Richardson take a step in the right direction in an interview on PBS. They discuss the unemployment rates among minorities and young people specifically, as opposed to the national figure. Something astounding that gets pointed out is that the unemployment rate is essentially double among African Americans compared to White Americans at every level of education (approximately 12% to 6% overall). A big cause of this is related to college education and “the fact that… blacks graduate at lower levels than white students do.” However, some of the age ranges that they use may not be the most significant as they include a range of ages 16-19 and the differences in the unemployment rates. Also, they completely ignore the labor force participation rate in this discussion, which brings me to my second point that the unemployment rate never tells the whole story.

While the difference in unemployment rates among white people and black people is startling, when you take the labor force participation rate into account, it is not as ridiculous of a spread. The LFPR among whites fell 2.2% whereas the LFPR among blacks fell slightly less at about 1.8% between Q1 2010 and Q4 2013. This means that more White Americans simply stopped working or looking for work, while comparatively more African Americans continued to work or search for work. Of course this affects the calculations of their respective unemployment rates (decreasing that for White Americans more than for African Americans).

In the end, I believe that we should, at the very least, disregard the national unemployment rate altogether. It can be the most misleading figure we look at each and every day and should not be considered valuable any longer.

December Employment Report: Implications for Monetary Policy

During the weekend, I looked a little further into the December employment report. In order to understand some of the more striking figures on the surface, I found it helpful to dig a little bit behind the numbers.

Let’s begin with nonfarm payrolls, which grew by 74,000. Not only is that number substantially below the expected gain of 200,000, but it is also the slowest pace in three years. The impact of inclement weather is considered to be an important factor. According to the Wall Street Journal, “An unusually high number of people said bad weather kept them away from work during the employment report’s survey period, suggesting cold and snow dampened the count”. However, taking a deeper look into the data shows that both weather-sensitive industries (i.e. construction and leisure) and non-weather-sensitive industries (i.e. business services and health care) registered poor results. In other words, there was restrained employment growth in weather-sensitive industries as well as non-weather-sensitive industries (If non-weather-sensitive industries outperformed weather-sensitive industries, then that would be another story). As a result, bad weather might not be a reasonable explanation for the significant miss on the downside in nonfarm payrolls.

Are the results of the report weak enough to suggest that the expansion is faltering? Hopefully, not. According to the Wall Street Journal, “[Federal Reserve Bank of Richmond President Jeffrey Lacker] said economists typically don’t view data from a single month as indicating whether the economy is shifting into a higher or lower rate of growth”. I find myself agreeing with Mr. Lacker. Nonetheless, the weak report raised doubts about emerging views that the recovery is gaining momentum.

Now let’s consider the drop of 0.3% in the unemployment rate to 6.7% (an unexpected improvement). A primary cause of the drop in the unemployment rate was due to individuals leaving the workforce. According to the Wall Street Journal, “The labor-force participation rate – the proportion of people 16 and over either with a job or seeking one – fell to 62.8% from 63%. If it had remained stable, the unemployment rate wouldn’t have budged”. Consequently, frustration among potential workers rather than fundamental improvement was the driving force behind the lower unemployment rate.

If you feel that the miss in nonfarm payrolls is significant enough to warrant concern about the health of the U.S. economy, then you might expect the Fed to reconsider its decision to taper. When you compound that feeling with the decline in the labor-force participation rate, you might become truly frightened for the U.S. economy. Federal Reserve Bank of Richmond President Jeffrey Lacker said Friday, “Federal Reserve officials are likely to consider another reduction in their bond-buying program later this month, despite Friday’s weak jobs report”. Not only do I agree with Mr. Lacker, but I think it is what most investors are expecting. Hypothetically, what if the Fed retreated on their decision to taper (and added to QE)? I think investors might sell because it would imply that the Fed is questioning the health of the economy. On the contrary, some investors might take it as a comforting notion indicating that the Fed is willing to be incredibly accommodative in providing liquidity and helping restore economic growth (after all, the Fed’s decisions going forward will be both an art and a science).

The difficulties interpreting this decline in the unemployment rate might encourage the Fed to reduce its threshold for the unemployment rate to 6% from 6.5%. According to the Wall Street Journal, “Nobody will be surprised if the Fed further reins in its bond-buying program when it meets later this month. But it may offer a dovish take on how much labor-market improvement it will need to see before raising short-term rates – something investors aren’t yet prepared for”. I think the Fed would be wise to revise their threshold for the unemployment rate especially when considering what is moving that number. Reaching the threshold is a prerequisite for talks about raising the interest rate target. It looks like we are set to reach that threshold soon and not for the right reasons (i.e. an improving economy). Due to the importance of forward guidance in maintaining expectations, I think it is important for the Fed to lower the threshold for UE and communicate a low interest rate policy.