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Friday, July 06, 2007

Labor Force Participation and Economic Activity

Quoting Brad DeLong quoting Greg Ip quoting Janet Yellen on the strength of the labor market (also see Barry Ritholtz and PGL):

How Close Are We to Full Employment?, by Brad DeLong: Maybe we're not very close, says Janet Yellen. Here's Greg Ip:

Economics Blog : Fed May Be Questioning Labor-Market Tightness: The Federal Reserve still sees the labor market as tight, but may be less sure of that than it was six months ago. The continued low level of the unemployment rate is one of the reasons the Fed has continued to say in its policy statements that the “high level of resource utilization” could add pressure to inflation. For some time Fed officials have thought slower economic growth would push up the unemployment rate, creating slack in the economy that would help keep wage and price gains from accelerating.

But there are signs the labor market isn’t as tight as the low unemployment rate suggests. One reason is the absence of a notable acceleration in wage growth. ...

Federal Reserve Bank of San Francisco President Janet Yellen, in a speech ... said, it’s possible “labor markets may not actually be particularly tight,” citing the restrained growth in employment costs. The Conference Board’s index of job market perceptions, she said, suggests that labor markets are “only very slightly on the tight side.” Ms. Yellen suggested she was sympathetic to these “benign explanations.”

The low unemployment rate reflects in part a recent drop in the “participation rate” — the share of working-age people either on the job or looking for work — from 66.4% in December to 66% in May. It edged back to 66.1% in June. Much of the drop in the participation rate has been among teenagers; contrary to the Fed’s expectation, the participation rate of older workers has actually risen. Jared Bernstein, senior economist at the Economic Policy Institute, a Washington think tank, noted the participation rate has fallen especially sharply for young people, blacks and Hispanics, groups who are “especially sensitive to the economy’s ups and downs.” If those missing workers were reported as unemployed, the jobless rate would be 5% instead of 4.5%, he said in a report. ...

I was curious to see how responsive the labor force participation rate is to economic conditions, so I graphed the percentage change in the participation rate against the percentage change in industrial production (both year over year) and this is what it looks like since 1990:

(click on figure to enlarge)

So there is a pretty clear association between changes in participation and changes in economic activity. Notice also that the recent downturn in the growth of IP that began in late 2006 led the downturn in participation by three months suggesting a causal link.

    Posted by on Friday, July 6, 2007 at 12:33 PM in Economics, Unemployment | Permalink  TrackBack (0)  Comments (11)


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