What Level of Job Creation will Sustain Full Employment?

Greg Ip at the Wall Street Journal on the interpretation of employment statistics. The Fed believes that demographic changes have lowered the amount of job creation needed to keep the economy at full employment:

Fed Holds Different View on Jobs Equilibrium, by Greg Ip, WSJ: ...A rule of thumb on Wall Street is that it takes about 150,000 jobs a month to keep up with the growth in the labor force and thereby keep the unemployment rate steady. But the Fed’s view is that “equilibrium” job growth is only 110,000 per month.

Fed Governor Susan Bies, in a speech ..., said that the proportion of working-age people participating in the labor force, either working or seeking work, is declining. That’s principally because more baby boomers are entering their mid- to-late-50s, when many take early retirement. Without that decline in the participation rate, equilibrium employment growth would be about 140,000 a month, she says. Chicago Fed President Michael Moskow said in an August speech that just 100,000 jobs a month represented equilibrium employment growth.

That suggests that what the street might see as a “weak” employment report may not ring alarm bells at the Fed, unless it’s well below 100,000. Conversely, a number even moderately above the consensus of 125,000 would keep the central bank on the lookout for wage and cost pressures. But monthly payroll employment is highly volatile and heavily revised, so policy makers will probably pay more attention to the less volatile unemployment rate. ...

The change from 150,000 to 110,000 is fairly recent. Michael Moskow's speech, the first time I heard the revised estimate, was in June, 2006, a year and a half after the trough shown in the graph below. Moskow said:

With overall population growth continuing to slow and labor force participation not expected to rise, we probably need to adjust our benchmarks for what level of employment growth is consistent with economic growth near potential and a steady unemployment rate. It used to be that increases in payroll employment that averaged 150,000 per month were consistent with flat unemployment. Now that number may be closer to 100,000.

Here's the overall participation rate, and it doesn't seem to support such a large change in estimate of the job growth needed to hold unemployment steady (to two-thirds of its previous value):

Participation has been increasing since the trough in January 2005, not decreasing (this graph ends at December 2005, but more recent participation figures do not alter the picture - see below). Furthermore, the scale of the graph is deceptive and the overall variation is small. Participation is 66.8% in January 1995 at the beginning of the graph, and 66.2% for the latest available observation for September 2006, only a .6% difference. The peak is 67.3% in January 2000, and the trough is 65.8% in January 2005. Here's a longer term view:

Labor Force Participation Rate

In addition, participation rates for workers over age 55 have been steadily increasing over the last ten to fifteen years offsetting some of the changes due to the changing demographic composition of the labor force toward older workers. See Cyclical and Long-Term Labor Force Participation Rate Changes by Gender, Age, and Education or the data at the BLS web site for more.

Comments

[ken melvin]

Disappearing Americans 101 – (What’s a half million here or there? )

The labor participation rate may be skewed by the employment of illegals. Rather being 66%, it may be 64% due to the 3.7 million illegals counted in the household survey but no tin the payroll. In fact, it could be 59% if all the some eleven million illegals show up as employed. There’s a very good possibility that for every illegal working in the US, a US citizen is unemployed.

[malcolm]

I suspect that illegals only matter for labor force
participation if their proportion in the labor force
has changed over time.

What is the mathematics of the 150,000 number and of the 110,000 number?

[me]

BS. They want me to work until I am 70, yet when my job went to India and I was 53, there are no replacement jobs. anything saying we don't need jobs is Bu** S*it.

[slink]

mark very nice job chopping this alibi
for an under performing job market

this 55+ line is really a joke
given a fairly well established trend increase
in p -rates
in this bracket

minkeying with the evaluative grid
is just moving the goal posts closer to mid field

next they 'll be using this as part
of the inflation alert

[save_the_rustbelt]

Any consideration about the quality of jobs, or does

job = job no matter what?

Year 2050 - 80% of Americans work in big box stores? :-)

[ken melvin]

40K/mo x 12mos/yr ~ half million. Half million x 6 yrs ~ 3 million. For the period, household survey exceeded payroll by some 3.7 million. Just adjust to fit the data I'd say.

[Juan Arturo]

I certainly remember during the first three years, the new unemployment apps. and the negative monthly job growth. Watching the second three years worth of job creation, I see figures that just don't seem to add up to the present low unemployment rate. I find it hard to argue with friends that claim Bush has done well in this regard since I always used to use the "We need at least 130,00 new jobs monthly..." as the basis for my arguement, but now see this new dynamic of 100,000 being touted as all that is needed for par. I am bewildered at all the confusing info around. Where I live (L.I.) it's hard to push "Things are not that good." because our unemployment rate is pretty low, but I wish I knew how to definitively prove to people that we are not teeming with jobs.

[anne]

No; during the 8 years of the dread administration of Bill Clinton there were not 110,000 or 150,000 jobs created each month, but 235,000 jobs. Last month, with a low recorded unemployment rate there were only 92,000 jobs created. There is something curious going on that I do not understand, along with others not understanding. What is so different that 235,000 jobs a month brought truly full employment with no meaningful inflation for Clinton while we have trouble staying over 100,000 jobs created with Bush?

[ken melvin]

"If, after a six year period when job growth exceeded population growth by some nine million jobs, unemployment was five percent in 2000 then the real unemployment rate in 1994 must have been nearly twelve per cent. Similarly, if population growth exceeded job growth by 1.2 million between 2000 and 2006 and unemployment was five percent in 2000 then unemployment must be at least 5.9 percent in 2006."

[anne]

Look to Economagic, http://www.economagic.com/. The unemployment rate as I recall in 2000 was in the 3% range.

[Laurent GUERBY]

Why not looking at employment / population ratio instead of participation rate? (population = all people, no random removing)

[Mark Thoma]

Angry Bear has the E/P ratio.

[slink]

what are you folks looking for ???

how bad is bad enough ???

rusty
relative to the contemporaneous economy
the big box jobs today
are no worse then pre union industrial jobs were
in the early part of the last century

god bless the CIO

but that was yesterdays victory ...

[ken melvin]

Love the ever decreasing standard. So much easier to attain. Only need 100k/mo and anyone who hasn't looked for a job in the last 4 wks is not unemployed. Should be able to reach zero unemployment forthwith.

[save the rustbelt]

slink

thanks, I needed some cheery news

[Lafayette]

"But monthly payroll employment is highly volatile and heavily revised, so policy makers will probably pay more attention to the less volatile unemployment rate."

As an individual statistic, yes, but on a year to year or 6-month to 6-month trend, no. Since trend analysis does not treat initial but final data.

The Fed should learn to keep an eye on historical trends, before reading "current" data in an oracular fashion.

And, frankly, I suspect that the Fed knows this all too well. Otherwise, they would do better simply reading the entrails of birds (much as the Romans did to predict the future).

Once again, this subject is Shakespearian: Much Ado About Nothing.

[Lafayette]

slink: "how bad is bad enough ???"

How about an employment rate that has never seen south of 6% since 1980 and never south of 9% since this week's figures. This is the history of unemployment in France.

Consider yourself fortunate to have contended with rates half this level.

[run75441]

Lafayette and others:

Why do you believe 4.4% is real? and this :

"That’s principally because more baby boomers are entering their mid- to-late-50s, when many take early retirement. Without that decline in the participation rate, equilibrium employment growth would be about 140,000 a month, she says. Chicago Fed President Michael Moskow said in an August speech that just 100,000 jobs a month represented equilibrium employment growth."

is latent hogwash. What they are trying to justify here is a decreased noninstitutional civilian population being a part of the work force. You know the BLS also measure those who are marginal.

"Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers = 8.1%"

If we had a shrinking population, similar to Europe, which is also aging in Europe, than there would be valid reason for what you (Lafayette) have cited in France. We do not have a shrinking population; we are replacing ourselves at a rate of 2.1, and are experiencing a growth in population of 1% per year (Smithsonian). Furthermore, the median age of the US is not increasing and it is at 35 which is younger than many other countries. Additionally, this immigrant population is being assimilated into the US which is not being experienced in Europe. I wrote about this, here, not that long ago. Yea I know, I am the newbie and have not proven myself as of yet.

The good facts are, we have a young and growing population. The bad facts are, we do not have enough equitable jobs to put this growing population into. One other cite and then I will shut up. Since the sixties, Participation Rate grew until 2001 when it dropped back to 66.8% immediately after the 2001 Recession (typical low point). It then decreased to 65.8% (lowest since 1989?) and has weaseled back up to 66.2% which allows the Pres to cite 4.4% when in reality it is close to 6% when factoring in a Particpation Rate of 66.8%. With a growing and young population, we are in deep trouble unless we can grow meaningful jobs faster.

The Baby Boomers will retire; but, they are being replaced.

[cm]

run75441: But, are the boomers being replaced in their jobs and at their qualification levels (domestically that is), or are a portion of productive jobs replaced by administrators/middlemen, and a portion of skilled jobs by unskilled jobs?

Who is helped by a transition from engineers, researchers, and manufacturing workers/outfitters to marketeers, sales "associates"/reps, and "restaurant" waiters? That's a transition from production to consumption, and it works for a while, but it hollows out the material base of the society.

[run75441]

cm:

My eyes are getting bad as this boomer ages. I think that is a cm?

You are exactly right in stating the higher level jobs requiring education are being replaced by those requiring lesser education. Why do you think that is? Is it truly because of direct labor costs required to make a product or is it something else involved in forcing jobs out of the country? A thought also on programming . . . is the their addition programming required once the product is made or is the change made a new product altogether? My thought being for programing and potentially other service related jobs making a product is the direct labor to make the product diminishes upon the sale of the product.

Anyhoo, back to maufacturing. Direct Labor involved in making a product today is no where near what it was in the sixties. Labor content has shrunk from over 20% to almost 10% of the cost of a product. The efficiency of manufacturing in the states is superior to Asia. Ok, so we charge $18/hour here ($12/hour for textiles) and we are charges back at $6/hour from Thailand and China (even though they may pay $1 or 2/hour). While there is a substantial savings to be had in comparison of a $1.80 to .60/hour in a product; I would say there are bigger savings to be had from eliminating other costs associated with manufacturing in the states. ie: Overhead.

Think about it, do companies in China or Thailand; pay Social Security, contribute to health insurance, pay for vacations, pay sick days, pay workman's comp., pay unemployment insurance, have EPA or OSHA laws, have minimum wage laws, have Overtime laws, have child labor laws, etc. All of these are added expense to manufacturing in the US and typically are 30 to 40% of the cost of manufacturing a product. This I believe is what companies migrate to Asia to avoid as they can always come back and sell in the worlds largest (it still is, is it not?) economy and market place. Big saving to go to Asia as companies no longer have to contend with the US's social programs.

So what do you do? The WTO frowns upon taxes; but yet, we have things like NAFTA and CAFTA that prescribe a certain amount of local content to be added to a product before it can avoid duties, taxes, and tariffs. This means material and labor. Companies provide a bill of material detail where each component is manufactured. Why not have our own reverse NAFTA? Think about it.

[run75441]

cm:

Still did not really answer the question, did it.

This is going to sound trite and it is. The difference is in the social costs of living in this country and the lack of them in other countries. Distribution costs, especially in light of rising energy costs, will become more of a factor. If we equalize the social costs between here and there, a large part of the advantge of moving jobs will disappear. Energy will negate some of the labor variance also. In such a scenario, it then becomes advantageous to have product manufactured close to the market it is sold in, all things being equal socially.

[cm]

run75441: Disregarding debt creation ("vendor financing") for the time being, to which extent are US pensions (including social security, which is really the socialized version thereof), workers comp, sick days, company paid healthcare, and various tax-based welfare benefits the basis of the domestic economic merry-go-round? Except for pensions, which affect/concern everybody, the other stuff is a risk-premium kind of thing, which can either be socialized/employerized, or which will draw on disposable incomes.

How does, let's say, a 10% distributed "welfare" tax (progressive perhaps) compare to a 10% (or more) disposable income shortfall because of sickness, unemployment, and other hardships? I may have 10% less, but some other people have accordingly more, and will buy the products of my company (which they otherwise won't, and I will be laid off). Mr. Moneybag will not buy more products from me, he can eat and consume only so much.

OTOH somebody could make the case that some number of people will collectively pay $10000 to keep some fucker alive and/or liquid who will then kick back let's say $5000 back to purchasing goods, rather than pocketing the $5000 net (which would otherwise go to some tax-paying and products-purchasing healthcare provider) and applying them to purchasing some stock or a new SUV.

It always comes down to value judgement. Unless the fucker is oneself, in which case this is precisely how things should always have worked, in this particular case.

Even in "welfare heavy" countries like Germany (as I can report from first-hand experience), people don't all recognize that social benefits (1) support their wages from below, and (2) create demand for the fruits of their labor.

[run75441]

cm:

Not quite sure what you mean; but, I will take a crack at it. First off, I do "throughput analysis." I look at the flow of materials and product through a facility and oprimize its flow achieving the lowest cost for the product. Included in this scenario are the movement of machines across the floor, inventory on the floor and in stock, and also manpower requirements. I am the "fucker" who is called in to fix what management, and government subsidized, has mismanaged.

You: "Even in "welfare heavy" countries like Germany (as I can report from first-hand experience), people don't all recognize that social benefits (1) support their wages from below, and (2) create demand for the fruits of their labor."

An interesting statement by you and I believe you answered your questions above with this statement.

You:"to which extent are US pensions (including social security, which is really the socialized version thereof), workers comp, sick days, company paid healthcare, and various tax-based welfare benefits the basis of the domestic economic merry-go-round? Except for pensions, which affect/concern everybody, the other stuff is a risk-premium kind of thing, which can either be socialized/employerized, or which will draw on disposable incomes."

You: "which can either be socialized/employerized, or which will draw on disposable incomes."

Isn't this (the statement directly above) the real issue? Right now employers pick up the load for these programs, legislated and customary benefits. Your ending statement is all inclusive when you allude to people not fully understanding from whence their benefits come. They will shop the WalMarts relishing the prices, ignoring how they are arrived at, and rail against a union automotive worker forgetting many of the legislated and customary benefits they enjoy. You and I both understand the alternatives which can be put into play shifting the burden of cost in any direction. The average citizen does not and reacts to the smiling face just above the price of the product.

You: "How does, let's say, a 10% distributed "welfare" tax (progressive perhaps) compare to a 10% (or more) disposable income shortfall because of sickness, unemployment, and other hardships? I may have 10% less, but some other people have accordingly more, and will buy the products of my company (which they otherwise won't, and I will be laid off).

You are going to be laid off anyway if nothing changes. So what is your point. Either government picks up the bennies and taxes you or comanies pick up their share of the burden or we do nothing and companies move overseas coming back to sell their product minus the burden and pocketing the difference. Not a hard concept to understand. The fucken company keeps the difference and you pay the taxes for them.

You: "OTOH somebody could make the case that some number of people will collectively pay $10000 to keep some fucker alive and/or liquid who will then kick back let's say $5000 back to purchasing goods, rather than pocketing the $5000 net (which would otherwise go to some tax-paying and products-purchasing healthcare provider) and applying them to purchasing some stock or a new SUV."

Healthcare does not provide a product, they provide a service using products made by companies. Ok, I guess we could go to the soylent green version of health care; but doesn't the US over spend on healthcare anyways in comparison while we chump down our Quarter Pounders? Your point is not clear.

The US is not wefare heavy yet; but, we will be given the direction of this administration. Prescription drug program for the elderly is a clear demonstration of the nationalization of medicine as it allows companies to discontinue their plans in favor of the national plan for retirees.

[cm]

run75441: I guess in a more abstracted form, the point is that many things in conducting life and running a society are "cost factors" -- food, healthcare, education, shelter, etc., and that money spent wisely and to somebody's reasonable benefit is not money lost. (Well, that's always a case of value judgement of course.)

Money flows through the economy in circles, and material goods, save for recycling/reuse, flow more or less from being extracted from the earth to being "excreted" to garbage dumps. All goods-producing and goods-moving processes are "leaky" in that they produce waste along the way.

One angle is, does a given flow of money result in a benefit rendered to somebody, or more production of waste, accelerated dumping of old goods, and potentially harm (war and military production)?

One underlying issue is of course how much money flows at all through certain sectors of the economy. That's essentially the subject of economic and fiscal policy. Looks like we are favoring showing off numbers and consumption over essentials.

[read the footnotes]

From Moskow's footnote: The methodology for forecasting labor force participation developed in Aaronson and Sullivan (2001) suggests that, currently, the participation rate is trending downward about 0.2 percentage point per year. Alternatively, Toosi (2005) forecasts a drop of about 0.1 percentage point per year over the next ten years, while Aaronson, et al. (2006) predict a drop of about 0.3 percentage point per year. Given that the working-age population is growing at a rate of about 1.2% per year, the median of these estimates implies a labor force growth rate of about 0.9% per year. On a base of around 135 million, this suggests monthly increases of approximately 100,000 for nonfarm payroll employment. (135 million * 1.009 / 12 = 101,000.)

Aaronson, Daniel and Daniel Sullivan (2001), "Growth in Worker Quality," Federal Reserve Bank of Chicago Economic Perspectives, 4th Quarter, pp. 53-74.
http://www.chicagofed.org/publications/economicperspectives/2001/4qepart5.pdf

Tossi, Mitra (2005), "Labor Force Projections to 2014: Retiring Boomers," Monthly Labor Review, November, pp. 25-44.
http://www.bls.gov/opub/mlr/2005/11/art3full.pdf

Aaronson, Stephanie, Bruce Fallick, Andrew Figura, Jonathon Pringle, and William Wascher (2006), "The Recent Decline in Labor Force Participation and its Implications for Potential Labor Supply," March, prepared for the Spring 2006 meeting of the Brookings Panel on Economic Activity.
http://www.brookings.edu/es/commentary/journals/bpea_macro/200603bpea_aaronson.pdf

[run75441]

cm and "read the footnotes":

I am out of town tomorrow to my daughter's wedding. I copuld not do honor to either of your posts to me presently. I will answer when I get back next week. "read the footnotes" much of my which I may quote comes from Brookings, CBPP, Tax Center, etc. so they are not foreign to me, I will read your citations. cm, I look forward to the discussion. In a large part, I agree with you. What, may I ask, do you do? I am always curious.

For my part I hold a Masters (and 3 other degrees) out of Loyola and was taught Friedman and Econometeric models.

[run75441]

cms:

I have read both the Brookings report and the 2005 BLS report.

A few things I would point out which go unexplained by the BLS (which I have freqently disagreed with in the past) and Brookings (which seems to be "suggesting" and are not in their usual concrete stance). Brookings, I have a tendency to agree with most of the time as their political leanings support my own.

Please excuse my typing today as I hurt my elbow in "wing chun" class and it is tender, even while resting on an Mueller cold jello pack. The thrills of getting older as a babyboomer.

BLS down-plays the current immigration patterns which will give this country a ratio of close to 50% Hispanic (~2050) with the rest of us being in the minority. The median age for the country is ~35 with a growing population that is essentially replacing itself. Bottom line is that we will be decreasing (or holding it steady) the age of our population as the babyboomers die out. Maybe, I am wrong here? Joel Garreau in "300 Million and Counting" does an excellent semi-statistical job of explaining the future demographics of the US and what is impacting it. We are a growing young country, much different than our European counterparts and vastly different than our Asian counertparts who are suffering from a dramatically aging population as a result of a low replacement rate and in some cases a low productivity rate.

BLS does not explain the precipitous drop from a Participation Rate of 66.8% at the end of 2001, and immediately after the 2001 recession, to 65.8% in 2005 (the lowest since 1989). 16 years of growth wiped out in less than 4 years? Do you really believe this is the result of babyboomers retiring or high schoolers continuing education? Especially in light of a growing poverty rate, a decreasing (or stagnant) US median income, increased college costs, decreased government aid for colleges, decreased Medicare/Medicaid benefits, higher prescription costs, etc. There is to much unexplained. Furthermore, Participation Rate increased from 65.8% in 2005 to its present rate of 66.2% which kind of defeats the BLS 2005 report findings as the BLS suggested a continued downward trend. This could be a blip in the future trend.

What is interesting is the willingness to justify job creation based upon a newly conceived lower Participation Rate blowing off the low job growth record of this administration who will have the lowest job growth record since Hoover. Look if we are truly going to compare Participation Rate in 2001 or pre-1997; than, we should remove the amount of people from the Non-Institutional Civilian Population the BLS is justifying and view what Unemployment is then. For sure, it would not be 4.4% or is it 4.6%. I would also tend to believe with a greater job creation of meaningful jobs, more people would come back into (circuitous, I know) the Labor Force as evidenced by the growing Participation Rate. In other words, I tend to believe the present issues with Participation Rate are more economics related and the Unemployment Rate is a sham.

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