« Tax systems are like... | Main | Beware the big-box that sits all alone »
May 09, 2005
Employment to population ratio--behind the headlines
PGL at Angry Bear recently commented on the lack of a rebound in the employment to population ratio (henceforth in this post: e/p) during the current recovery.
Fortunately, we saw some improvement in the labor market this month, which showed up in higher EP and LF ratios. I’m on record for praying for a return to the days of having employment being 64% of the adult population. Let’s suppose some forecaster tells us his macroeconomic model predicts a 4.5% unemployment rate by the end of 2006. I’m sure some Administration apologists will go giddy with glee, but I’m going to look at the details as to what the forecaster is saying about the labor force participation rate. If the forecast is for LF = 67% so EP = 64%, I’ll join in the glee. But if the forecast is for LF = 66% so EP = 63%, I’ll continue to argue we should hold to higher standards before we declare full employment.
Right now, total e/p is at 62.6%. It was around 64% before the recession (hence PGL's comment) and bottomed out around 62%. But let's go behind the total number and break it down as the BLS does. (All data is available on the BLS site.)
My series starts before the 1990-91 recession for some additional historical perspective. Some things should pop out at you. The decline in e/p for males 20 and over was similar in both cycles. In the '90s the ratio never quite made it back to its level before the 1990-91 recession. Hence, the trough was a little lower. The recovery does not seem altogether much worse than after the last recession, though it is a little early. The ratio didn't make it back up to 73% until nearly 1995 after the last recession. Demographics will start working against us on this series very soon as well if some baby boomers start to retire early. Whether the e/p ratio can attain the level at its last peak is a serious question, just as valid today as in 1995. Like PGL, I would like e/p to get back to something more akin to full employment, but I also think there should be research into what that level is for the demographics.
For women age 20 and over, the picture is not quite as bright, and it is a very different picture indeed. The e/p ratio fell only slightly in the last 1990-91 recession and then quickly returned to its former pace as women continued to enter the workforce during the '90s at a rapid pace. After falling nearly 2% in this recession, it has stabilized at just over 57%. For reference, this is about the level of early 1997. The speed with which the ratio will return to its previous level depends on what kind of continued gains in e/p women would be expected to see in a full employment economy and the elasticity of labor supply. Those, too, are interesting questions that could be pursued.
And so we come to the real story behind the story. Both sexes ages 16 to 19. Their e/p ratio practically fell off the chart in this recession and has not started to recover at all. The reasons for this are many, but the CBO (who I do not categorize as apologists for the administration) seems to have found one factor. Men and women ages 16 to 19 as well as those 20 to 24 are more likely to stay in school than even just a few years ago--enough to make a difference. This fact does not explain everything. Employment rates are lower even among non-students. This could be due to increased competition from unskilled immigrants, among other things, according to the CBO. The entire report, published in November of last year, is worth reading--too much to summarize effectively in a single post. But the comments are open to anyone who wants to read the report and talk about it.
While you're at the CBO, check out these titles which are apropos to the topic at hand.
Disability and Retirement: The Early Exit of Baby Boomers from the Labor Force
CBO Projections of the Labor Force
UPDATE: PGL responds at Angry Bear an in the comments to this post. A commenter at Angry Bear remarks that job prospects drive schooling. Hence, the increase in enrollment is not something to celebrate. True, there is a cyclical component that I think can be seen quite clearly in the more dramatic response in e/p in both of the last two recessions. As with the males over 20, the cyclical declines in the series are very similar in the two recessions. But what explains the fact that teenage e/p failed to reach its pre 1990 peak during the late 1990s? School enrollment seems a good place to start.
Another commenter here claims that minimum wage increases also contribute to what we are seeing here. It's hard to separate the effect of the recession and the coincident increase in the minimum wage in the early 1990s. However, the minimum wage increase in 1996 and 1997 where the chart does show a little weakness. There were two separate increases in the minimum wage, and the timing works well for one but not the other in the chart. Thus, I'm hesitant to pin an inordinate amount of significance to it, but I'm willing to accept it as a possibility, especially for late 1996 and early 1997 where it probably did have some effect on keeping teenage e/p from rising more rapidly.
The fact that students may stay in school longer when job prospects are poor does not invalidate my point that the e/p ratio may decline over time due to a combination of a long run trend towards more schooling and the demographics of an aging population.
UPDATE PART TWO: Bob Herbert laments "The Young and the Jobless."
Posted by William Polley at May 9, 2005 03:58 PM
Trackback Pings
TrackBack URL for this entry:
http://www.williampolley.com/cgi-bin/mt-tb.cgi/227
Comments
I suspect some of the early reductions in male E/P ratio might be due to early retirement changes in Social Security.
And I know that some of the dramatic reduction in E/P age 16-19 is due to minimum wage increases, especially in the early 1990's.
Posted by: Mr. Econotarian at May 9, 2005 07:36 PM
Good stuff. I was also interested in the "Early Exit of Boomers" (I'm in that category). If you look at the "Retired" group, 73% of them have defined benefit plans ... so they can live on savings until the retirement plan kicks in.
I think most boomers will retire with 401(k) plans and that most boomers have underfunded their plans. So I expect we will see many boomers working longer than previous generations or living close to poverty on SS.
Oh ... Nice photo!
Posted by: CalculatedRisk at May 9, 2005 07:42 PM
Very good post! I agree that demographics will lead to a lower natural e/p ratio in the future. This intelligent critique of my (e/p)* = 64% statement is a lot better than the Lawrence Kudlow claim that these demographics excuse the drop in e/p a couple of years ago.
Posted by: pgl at May 10, 2005 08:18 AM
I posted before I read CBO's discussion - and before I went to certain customized detail from BLS. Angrybear readers suggested the largest decline in labor force participation was among the young'uns. True - and the 55-64 crowd say an increase. But the labor force participation rate of the elders has traditionally been quite low. So Bill's suggestion about overall labor force participation being about to decline in the near future strikes me as exactly right!
Posted by: pgl at May 10, 2005 02:11 PM
BTW - pay less attention to my new table over at Angrybear and more to the comments from Donald Coffin. He breaks down the labor force participation for the 55+ crowd very nicely. For all subgroups, it is up since late 2000. Roughly, it is near 70% for the 55-59 crowd, 50% for the 60-64 crowd, 25% for the 65-69 crowd, 15% for the 70-74 crowd, and 5% for the 75%+ crowd.
Posted by: pgl at May 10, 2005 03:57 PM
PGL,
Yes, I saw Donald's comments. Very good.
Posted by: William Polley at May 10, 2005 04:12 PM
Increases (decreases) in the real value of the minimum wage are alleged to increase (decrease) labor supply as they allegeldy decrease (increase) labor demand. Now if the participation rate reflects the former, one would expect a higher REAL minimum wage to increase the participation rate. I'd be curious if a good statistical analysis led to the alleged correlation suggested by the AB reader - or if the correlation would fit the version of the model that I just suggested.
Posted by: pgl at May 11, 2005 05:46 PM
My 19 yo son has been looking for a job for a year now with no success. Not even getting called by employers after turning in tons of applications. I'm 46 and have been out of the job market full time for almost 3 years now, done some consulting work but currently have no desire to be in this job market. Those who are working are over-worked and underpaid, so where is the incentive to be working at all unless one has to? I'm fortunate not to need to right now. The last Bush-driven recession, during Bush I's term, I stayed home with my kids rather than having to work full time plus overtime just to make $12,000 after taxes (yes, I figured it out). So what is the incentive to even be in this job market unless one needs to?
People work for more than a paycheck, and when those incentives are not there, why bother? When employers are taking advantage of workers, underpaying them while taking record profits and making sure they get their multi-million dollar bonuses, it's not really an incentive to those of us who have a choice to be in the workforce or not. When they are willing to respect and value workers again, there will be much higher employment numbers again.
Posted by: donna at May 20, 2005 10:17 PM
Is this Employment to population ratio for the United States only? or is it universally?
Posted by: Emilia at February 19, 2008 10:34 PM
US only. Combining E/P ratios across countries would be problematic because they differ greatly due to cultural, legal, and structural economic reasons.
Posted by: William Polley at February 19, 2008 11:03 PM