There has been lots of handwringing over the issue of labor force participation and its decline during the Great Recession. The most straight forward comes from Mike Konczal
It’s always a challenge to find new and interesting ways to describe how terrible the labor market it. This is even more true as the unemployment rate is starting to decline though the employment-to-population ratio is roughly staying the same.
. . .
Even though the population is growing, the labor force has been flat for about four years now. Even worse, we don’t have a similar flatline anywhere else in the post-Great Depression to study to get some sense of the consequences of this. The recessions of the early 1960s and 1990s had flatlined labor force growth, but nothing like what we see how. How do we even go about understanding if and when it’ll converge back to trend?
I understand the intuition here, I really do. But, I just can’t get on this train.
We say markets work when every buyer can find a seller and every seller can find a buyer. Now, obviously in the intricate matching and commitment involved in the labor market this becomes complex.
Hiring a worker is a big deal. Why its such a big deal and why everyone doesn’t work for the equivalent of temp or consulting firms is a interesting question in itself. However, we do know that it in this world they do not. And, in this world hiring and firing workers is a process many folks don’t take lightly.
Nonetheless, when we are trying to analyze the distance of the economy from equilibrium, from a market characterized by equalized marginal utility products across resources, then I am really, really stuck to the notion that every seller finds a buyer and every buyer finds a seller.
In the absence of strong evidence our baseline conclusion has to be that something real about the economy is changing. That real thing might be unfortunate, but its not the same as the labor markets failing to clear.
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Thursday ~ December 22nd, 2011 at 10:09 am
DocOc
I think the intuition is that many of these people are somehow stealthily still in the labor market. i.e. they aren’t looking NOW, but plan to as soon as they perceive things getting better. Hence, the decline in employment/population somehow measures a more ‘real’ unemployment.
If this intuition is correct, we’ll see a spike in unemployment around when we start creating lots of new jobs.
Thursday ~ December 22nd, 2011 at 11:28 am
Lord
Yes, there are shadow unemployed, but the longer we are without jobs, and we may not create lots of jobs for a very long time, the more they will be unable to return whatever they wish.
Thursday ~ December 22nd, 2011 at 10:40 am
Benny Lava
Does employment to population ratio take retirees into account?
Thursday ~ December 22nd, 2011 at 10:59 am
Curt Doolittle
What do ‘employable’ people have in common the that is lacking by those who are unemployed?
Thursday ~ December 22nd, 2011 at 11:45 am
Mike
If what I think you are saying is true, how do you theorize people transitioning from “unemployment” to “not in the labor force”, a transition that is a very common occurrence in the economy?
Thursday ~ December 22nd, 2011 at 12:06 pm
Andy Harless
There is strong evidence of a cyclical pattern in labor force participation, and this is a very extreme cycle, so it is reasonable to expect that we would see a more extreme version of the usual pattern, and it is difficult to tell just how extreme, since we don’t have any comparable data on which to estimate (and we probably shouldn’t trust linear extrapolation beyond a certain point).
Moreover, in principle, the unemployment rate does not necessarily indicate the degree of failure of the labor market to clear. The unemployed are people for whom the expected benefit of job search exceeds the cost. If it were known with certainty that no job seekers could find employment (and if unemployment insurance benefits were not conditional on job search) then the unemployment rate would be zero, even if there were plenty of qualified people who would like to have one of the jobs currently held by someone else (i.e. a failure of labor market clearing). More generally, to the extent that there is reliable information available on the lack of employment opportunities, we should expect to see failures of labor market clearing reflected in lower participation rates rather than higher unemployment rates. In theory, a high unemployment rate might even reflect a very strong labor market, in which the returns to searching are high because of the chance of getting a better job.
Granted, in practice, the unemployment rate happens to be a good cyclical indicator of failures in labor market clearing, but it is hardly the only indicator.
Thursday ~ December 22nd, 2011 at 1:34 pm
Will
I am surprised at the degree of denialism over the declining labor force participation rate. We already observe this phenomenon in Japan and Germany which are further along in their demographic transition. The primary reason for the dropping participation rate is simply aging and the shape of the population pyramid. This was accurately forecast by the Fed itself in 2006, well before the onset of this recession. While I am sympathetic to Keynesian arguments for more near term stimulus, it is dangerous to constantly assert that structural economic phenomena are cyclical. The labor force IS shrinking for a very straightforward demographic reason, and eventually the Fed will have to accept that U.S. growth potential is lower as well.
Thursday ~ December 22nd, 2011 at 3:49 pm
Lord
Primary seems an exaggeration. Nor should we confuse structural with desirable. If someone over 50 can’t find work and drops out, that doesn’t mean they want to or would if hiring better. The biggest structural factor has been the young dropping out, presumably to further their education, and because they have the resources to fall back upon, their parents whose participation is higher than normal.
Thursday ~ December 22nd, 2011 at 6:22 pm
Andy Harless
There is longer-term trend of declining labor force participation, which was predictable due to demographic changes. It explains part, but not most, of the decline that has taken place between 2009 and 2011, though an interaction of cyclical and structural factors might explain why the decline was more precipitous during these years. But I wouldn’t cite Japan as an example, because it has had, for the past 20 years, the same cyclical issue that the US has developed in the past 3. Germany we can talk about.