I have noticed that Bank Economists, and Financial Journalists seem to be very concerned about the labor force participation rate. Moreover, this concern preceded the recent hubbub over benchmarking the labor force.
My question – why?
To a first approximation I just don’t care about the labor force participation rate and I am not sure why anyone should. You could say that it reflects the size of the taxable economy moving forward and that’s important for measures of the burden of the welfare state, but lets be serious. The movements are small, the workers marginal and the general trend towards an aging nation visible for decades now.
Sometimes I think I am detecting a sense that folks are concerned that Labor Force participation will affect the unemployment rate. Eh. Its complicated but there is no lump of growth nor a lump of job creation even in a recession. To put it terms now common place, the number of people who want to work affects the natural rate of interest.
If lots of people are trying to work they will drive up demand for capital and durable goods in the attempt and this will drive up the natural rate. In the face of a constant Fed Funds rate this will mean a faster growing economy.
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Tuesday ~ February 7th, 2012 at 5:03 pm
Adam Gurri (@adamgurri)
I think there’s a school of thought which says that a decrease in labor force participation can be a sign of people giving up entirely after an entirely fruitless job search–in other words, the decline may be picking up on a weakness in the labor market that is not reflected in the unemployment rate.
Tuesday ~ February 7th, 2012 at 5:21 pm
tjic (@tjic)
> I am detecting a sense that folks are concerned that Labor Force participation will affect the unemployment rate.
I think you’ve got it exactly backwards.
I think that people care about the unemployment rate, in so far as they do, because it seems to be the proximal statistic to what they REALLY care about: how many people are working, how good the economy is, what the ratio of makers to takers is.
For a fixed LPR, a varying Unemployment Rate does, in fact, convey most of the information that folks want.
…but when the LPR and the UR are both free to move, then suddenly the validity of the UR as a tool to measure the issues that many of us feel are important breaks.
Let me reverse the question: do you care about the unemployment rate / should anyone? If so, for what purposes is the UR a better tool than the LPR?
Tuesday ~ February 7th, 2012 at 6:15 pm
Curt Doolittle
Because Politics != Economics. Economics is a subset of politics. I know you can’t stand it. But that’s how it is.
Tuesday ~ February 7th, 2012 at 6:15 pm
Andy Harless
“the number of people who want to work affects the natural rate of interest”
Given that we’re at the zero bound (and that we have restrictions on immigration and a low expected inflation rate) doesn’t that make the labor force participation rate important? Faster labor force growth would raise the natural interest rate, thereby increasing the chance that it would be above zero (and further above zero), thus reducing the duration of the output gap and reducing the risk of prolonged output gaps in the future.
Also, there’s hysteresis, which means that current labor force participation is complementary with future labor force participation, and reductions in labor force participation in the short run bring us further away from the first-best optimum in the long run. To the extent that declining labor force participation reflects the fact that the labor force is currently an inhospitable category to be in, we’re talking about conditions that result in large lumps of labor being shifted away from their optimal use, bringing us to a bad intertemporal equilibrium (with an inefficiently large informal sector and an inefficiently small formal sector) and away from a good one.
Wednesday ~ February 8th, 2012 at 9:44 am
John Seater
The labor force participation rate (LFP) started falling in 2000, not 2008. It stood at 67% in 2000, and now is at 64%. Before that, it rose over the period 1965-2000, starting at 59% and ending at 67%. Going back to 1947, when the data start, it had no trend, fluctuating around 59%. For the data, go to
http://research.stlouisfed.org/fred2/series/CIVPART
Now, just what are we supposed to conclude from those long term changes in trend? Beats me. It seems that, for reasons that are not at all clear, people gradually decided to exchange leisure for consumption over 1965-2000 and then did the opposite after 2000. I see no obvious government policy changes that line up with the changes in LFP, nor do I see any obvious social changes. 1965 was too early for women’s lib to explain the growth in LFP and surely can’t explain the post-2000 decline. Tax rates, spending, regulation – I can’t see any policy changes that explain LFP, so I presume it is due to something else. As a result, I also can’t see what social significance to read into it, except that in the US people are free to work as much or as little as they want and exercise that freedom.
Wednesday ~ February 8th, 2012 at 7:36 pm
cheesehedge
It is amazing how people continue to wage an intellectual battle against the reality of a structural decline in the U.S. labor force. It is not a mystery, it is simple demographics. The decline in U.S. labor force participation has been happening for more than a decade, was predicted by the Fed before the recession, and will continue. Here is a more exhaustive exploration of this issue at my blog: http://cheesehedge.com/2012/01/13/unemployment-less-slack-in-the-u-s-economy-than-you-think/
Thursday ~ February 9th, 2012 at 3:34 pm
rjs
in re “the general trend towards an aging nation visible for decades now.”
that isnt the problem: http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/01/Labor%20Force%20Part%20Rate.jpg
it’s increasing for those over 55, decreasing for everyone else, especially the young
Thursday ~ February 9th, 2012 at 11:07 pm
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[...] others have warned that the measure of Labor Force Participation is more important. Others, like Karl Smith, think that’s [...]