Friday, January 20, 2017

The labor force participation rate vs. the unemployment rate


 - by New Deal democrat

This is the third of four installments looking at whether and by how much people get drawn into the labor force as economic expansions progress.  This is part of a broader look at how close we might be to "full employment."

In the first installment, I showed that if we norm for the long term secular trends, both men's and women's participation in the labor force does go up during economic expansions; i.e., as the economy improves, more and more people who aren't interested in working decide that they do want a job.

In the second installment, I showed that wage growth appears to have very little if any value in forecasting or even correlating with increased labor force participation.  If anything, the correlation appears to run the other way:  increased labor force participation correlates with lower real wages at least over the longer term, but not in any consistent way.

Now let's take a look at whether tightness in the labor market as shown by the unemployment rate correlates with an increase in labor force participation.  Because the U-3 rate has a much longer history than the broader U-6 underemployment rate, that is what I am using.  Note also that for purposes of scale (this will be important later) I am dividing the YoY change in the unemployment rate by 4.

Here is the YoY% change in labor force participation for men, +0.3% to norm for the secular declining trend, compared with the unemployment rate (inverted so that a decrease in the rate shows as an increase in the graph). I've split this up into three time series better to show the relationship.  First, here is 1950-64:


1964-1990:


1989-present:



In the 1950s, there is no discernible correlation.  But beginning in the 1960s, and all the way up until the present, there does appear to be a significant correlation between a decrease in the unemployment rate and an increase in men's participation in the labor force.

Now here is women's participation, -0.3% through the 1990s to norm for the secular trend of their entry into the labor force during that time.  First, here is 1950-1965:



1965-1995:



1996-present:



With the exceptions of the late 1950s-early 1960s, and the recovery since the Great Recession, once again there does appear to be a significant correlation between a decrease in the unemployment rate and an increase in women's participation in the labor force (but note the poor relatinship in the present expansion, which will be dealt with in the last installment).

Remember that I told you to keep the division of the YoY change in the unemployment rate by 4 in mind?  That's because the above graphs suggest that, although it is a very noisy relationship, a back of the envelope estimate is that for every 1% change in the unemployment rate, there is a .25% change in the labor force participation rate for both men and women.

Not only is there a significant correlation between the unemployment rate and labor force participation, but it appears from the above graphs that the unemployment rate *leads* labor force participation by 1-2 years.  This is also shown  when we compare the difference in the YoY change in the two: 



Compared with trend, the LFPR outperforms later in the expansion as the unemployment rate flattens and then begins to rise, while it under performs relative to trend when the unemployment rate begins to turn down early in a recovery.

In the last few months, the unemployment rate has declined to new lows.  That suggests that in the next 12-24 months, the LFPR will increase compared with trend.  If the unemployment rate were to decline another 1% to 3.5%, thereafter we should expect roughly another +.25% YoY increase in the LFPR compared with trend, which translates into a very slight nominal increase.

But this relationship, while important, isn't the end of the story.  Because we still have the issue of retiring Boomers, and we still have the fact that women's labor force participation barely budged for 6 years after the end of the Great Recession.  A year ago I wrote a series on the "child care cost crush." So in the final installment, I will take a look at these issues.

Thursday, January 19, 2017

December housing permits report: good news


 - by New Deal democrat

The December housing permits report this morning portends good news for the economy in 2017 for several reasons.

This post is up over at XE.com.

Wednesday, January 18, 2017

Gas prices push inflation above Fed target


 - by New Deal democrat

Looks like we are shortly going to find out whether 2% inflation is the Fed's "target," or whether it is really a ceiling.  My bet is on ceiling.

Why? Both headline and core YoY inflation are already above 2% as of this morning's December report.

My fuller discussion of the implications for 2017 is up at XE.com.

Tuesday, January 17, 2017

The Bank of England May be Facing Inflation in the Near Future

This is over at xe.com

Real wage growth vs. labor force participation


 - by New Deal democrat

This is the second of four installments looking at whether and by how much people who are out of the labor force decide to seek employment as an economic expansion continues.  This is part of a broader issue of how close we are to full employment.

In the first installment, I showed that once we separate labor force participation into men and women, then we see two separate but equally stable long term trends.  Men's participation has declilned at a fairly steady -0.3% YoY over the long term, while women's participation increased by about +0.5% YoY over from 1955 to the late 1990s.  Once we account for that secular trend, in both cases we find that within any given business *cycle,* both men's and women's participation has increased compared with that trend as the economy improves, and deteriorates compared with the long term trend during and around recessions.

In short, as an economy improves, people are drawn off the sidelines into the labor pool.

In this installment, I'll look at whether this increase in participation correlates with real wage growth.

Once again, I'll separate men's and women's participation.  Here is the YoY% change in men's participation, +0.3%, compare with the YoY% change in real wage growth (green) from 1955 to the present:



There is no particular correlation. In particular if anything real wage growth and  participation go in  opposite directions during the early 1970s, almost all of the 1980s, the mid 2000s and around the end of the Great Recession. 

Here is the same graph for women, first subtracting -0.5% YoY from 1955 through the late 1990s:


and with no adjustment YoY thereafter:


Once again, it is hard to see any definitive relationship. Throughout the 1970s, and again in the later 1990s, there is almost an inverse relationship, although since about 2002 there may be some broad and noisy convergence.

If anything, over the long term there may be a slight correlation between an increase in labor force participation and decreasing real wages! 



The above graph shows the overall age 25-54 participation rate for both sexes, inverted (so an increase in participation shows up as a decrease on the graph) compared with real wages. Note that the period showing the biggest jump in participation (the 1970s) showed the biggest YoY declines in real wages, while the periods with the biggest declines in participation (the several years after each of the last 3 recessions) coincide with the subsequent recoveries showing the biggest real wage gains. 

So, the hypothesis that, as real wages improve, more and more people will be drawn into the labor force is tenuous at best. If anything, the relationship may be the opposite, and causation run the other way. In any event, surprisingly watching real wages does not appear to give us any insight as to what may happen with labor force participation. 

In the next  installment,  I will look at the relationship between labor force participation and the unemployment rate.

Monday, January 16, 2017

Measuring the effect of the economy on labor force participation


 - by New Deal democrat

One of the big conundrums during this expansion has been why the labor participation rate has remained so low.

As a refresher, among the entire population age 16 and over, the Census Bureau divides people into "employed," "unemployed," and "not in the labor force."   Among the nearly 100 million people who are "not in the labor force" at all, every month the Census Bureau asks them if they want a job now.  Consistently, month after month and year after year, over 90% of these nearly 100 million people tell the Census Bureau that they *DON'T* want a job now (due to, e.g., being in school or retirement).  As of last month, those who are out of the labor force, but want a job now totaled about 5.6 million people.  Even in the tech boom of the late 1990s, at least 4.4 million people fit this description:



Last week I asked "how close are we to full employment?" and answered that it looked like we were about 1.5% away.

But a broader question is, as the economy improves, are people who aren't in the labor force enticed to enter it, by better wages or an easier ability to find a job?  That's what I'm looking at this week.  Today I'll set the table with a brief overall look.  Later this week I'll take a look separately at how much improving wages matter, and how much a lower unemployment rate matters.

Let me start by looking at two overall graphs.  First, here is the labor force participation rate vs. real wages for the last 50+ years:



Second, here is the labor force participation rate (inverted) vs. the unemployment rate for the last 50+ years. The  LFPR is inverted because presumably we mainly want to see if decreased unemployment is associated with an increase in particpation:



There's nothing useful here! The LFPR goes up until the mid-1990s, then sideways, then takes a dive during the "great recession."   Meanwhile the unemployment rate zigzags up and down, and real wages go up, then down from 1974 to 1995, then zigzag up and down and up again.

Part of what is going on is the different long-term trends of men and women in the labor force.  The participation rate for men in the labor force has been falling, more or less steadily, since the 1950s.  Meanwhile women entered the workforce by the millions between the 1950s and 1990s, but their participation rate has held steady and then fallen slightly since then. A second more recent issue is the ongoing retirment of the Baby Boomers:



But the big thing to notice for my purposes is that once we separate out men and women, we see that the increasing/decreasing trend for each holds basically steady for decades.  In the 60 years since 1955, men's participation has fallen by a little over 18%, or -0.3% per year on average. In  the 45 years between 1955 and 2000, women's participation rotse by about 25%, or a little over +0.5% per year, before basically leveling out. 

Thus, if we look at each year-over-year, and factor in the above long-term trends, then we ought to be able to tease out the cyclical change.  Here's what we find for men (participation YoY -0.3%):


and for women (participation YoY +0.5%):



Now we can see that, although it is a little nosiy, the labor force participation for both men and women increases compared with trend during economic expansions, and then decrease around recessions.

Armed with this information, in part 2 I'll compare this with real wages.  In part 3 I'll compare with unemployment.  Finally in part 4 I'll take a brief look at child care issues and the effect of the retiring Boomers.