LFPR and the New Macroeconomics

The civilian labor force participation rate (LFPR) tells the percentage of the population that wants to work. That is, it counts those with jobs and adds those who are looking for jobs and relates that number to the size of the population. Not everyone wants to be in the labor force -- some are too young or too old. Some are busy getting education. Some are sick. Some don't want to work for a variety of reasons. So LFPR is never close to 100%. 

US LFPR generally increased after World War II until early 2001 after it reached a little more than 67% of the population. Since then it has been falling and was recorded as 62.7% in May 2017. This roughly 4% decline is meaningful -- 4% of the US population of 230 million people is about 9 million people who no longer participate in the labor force. To put that number of 9 million in perspective – that’s about how many people work in manufacturing. That’s like everyone in New Jersey deciding they would no longer take or look for a job. No New Jersey jokes please. 

This new 16-year trend is important. I am going to argue that it is very important and may constitute the beginning of a new phase of macroeconomics and policy. As I said last week, macro is becoming obsolete. Monetary and fiscal policy are out of bullets. Supply-side policy has political downsides. So what’s left?

The answer might reside in the LFPR. Today’s experts repeat over and over that the lackluster economic growth predicted for the future is caused by lack of business spending on capital and a reluctance of people to join the labor force. One could go further and say that the former is related to the latter – firms are pessimistic and won’t invest more because they see LFPR as a major problem and do not see a government that is doing anything about current economic challenges.

Future macroeconomic theory and policy, therefore, should be focused on LFPR. I have mused in this blog in the past that if labor is not forthcoming and if the labor that does come is not prepared for the jobs of the future, then maybe we should focus on that mismatch. In macro we usually take that mismatch as secondary and hope it will be solved by national economic growth induced from traditional monetary and fiscal policies. But that puts the cart before the horse. Maybe today we need to focus on labor mismatch and if we solve that then maybe economic growth will improve in the process.

This post today is a humble beginning in this direction, and my only goal is to shed some light on the data. Today I look at some of the data as it relates to the LFPR. I got the data from the FRED service at the St. Louis Federal Reserve Bank. I look at data from 2002 to 2017. The goal is to better understand or break down the above-mentioned roughly 4% decline in labor participation in the USA.

Consider first, men versus women. The table below shows that LFPR for both men and women fell between 2002 and 2017 – but it fell more for men – falling almost twice as much.

                        Women    Men   Gender Gap

2002                 59.6          73.9    14.3

2017                 57.0          69.0    12.0

Change             -2.6          -4.9    

Next, look at age. In 2002 almost 84% of those in the prime work ages (25-54) looked for and/or found work. Younger people worked too – 76% was the LFPR for those aged 16-24. Those 55 years or older had a much lower rate at 34%. The changes in the next 25 years are interesting. For the regular working ages the LFPR went down by only 2%. Those at the younger end found participation rates falling by at least twice as much as their seniors. As for the older folks, they are participating dramatically more – an increase of almost 6% in their LFPR!

                        25-54    55+  16-19 20-24

2002                83.7      34.2    76.7   75.4

2017                81.7      39.9    71.9   70.4

Change            -2.0      +5.7    -4.8    -5.0

Finally I look at education. The first column looks at high school graduates 25 years and older; the second is college graduates 25 years and older. The impacts of college education on LFPR are dramatic. While college-educated people did participate somewhat less in 2017, the change for high school grads was much larger – almost five times as large.

                        High School              College

2002                          64.4                75.4

2017                          58.0                74.0

Change                      -6.4                 -1.4

This excursion through some data is meant to be a first step in looking deeper into a major macroeconomic challenge. Surely this is not enough data to form solid conclusions. Curious minds would wonder about other and finer breakdowns as they relate to education, training, age, race, location, industry, and more.

What is going on in the last 16 years? This data suggests that the largest groups to explain a slowdown in labor participation are young males with less education. Surprisingly, older people who should be enjoying time on Alaskan cruises sipping JD seem to be increasing their participation.

A scientific friend of mine said that most good science starts with data and ends with understanding. Labor force participation data needs to be better understood. Then perhaps we will know WHY participation is flagging and perhaps what we can do about it. Let's get back to work!

It's the Economy, Stupid

What joins us all together is the reality of the economy. If the economy tanks tomorrow, Democrats and Republicans will lose jobs or find their incomes rising less than hoped. If inflation roars back, we will all complain about the higher prices we have to pay.

While Ds and Rs have their preferred recommendations for economic policy, what will matter most is not who is right but whether or not we attend to real economic problems and make improvements in our lives.

So rather than dwell on policies and policy debates, I thought it wouldn’t hurt to lay out where the health of the economy sits right now. This amounts to a description of economic challenges, or you might say for those of you on post-New Year diets, this amounts to the before-diet picture.

Dieters want the post-diet photo to show major beautiful changes relative to the before-diet photo. So where you begin is very important. But even where you begin is not completely objective when it comes to the economy. And some people might think that any description of the economy right now is tainted with politics. An Obama supporter might disagree with any remarks that show a weak economy. The Republican would bristle at the idea that the economy might look strong right now.

Furthermore the economy is pretty complicated and dynamic. Anyone who attempts to describe the current economy might be leaving something out – or might be too focused on the latest data rather than more enduring trends. I readily admit that this is no easy task. And no matter how hard I try it won’t be perfect.

But it ought to be done and those who disagree with some of the conclusions below are free to ignore them or to add their own comments.

The place to start is with the growth of national output – or what we call real GDP. Most people would agree that it is not growing as fast as it used to. While there have been some quarters of decent growth in the past eight years, the overall trend is modest. We grew at a faster pace during most of the 1990s and right before the great recession of 2008-09.

Associated with that growth has been enough employment growth to push the unemployment rate down to levels close to what we describe as “full employment.”

Despite this increase in employed persons, we also have high levels of people who have been unemployed for more than 15 weeks, high levels of people who want full-time jobs, many folks who took jobs beneath their skills, and finally a lot of people who simply quit looking for jobs.

Despite an increase in the demand by employers, many workers lack the specific skills being demanded and thus shortages of workers exist side-by-side with surpluses of workers. The net result is that wage gains are lacking, and we talk about labor market mismatches.

Looking deeper at the modest real GDP growth we find one sector particularly lacking. Consumers are pulling their own weight through spending on housing and autos purchases. But the spending by firms on plant, equipment, and software has been in the doldrums. This has two key impacts. First, near-term growth lacks punch and second, new investments by firms have not raised productivity of workers and have harmed international competitiveness of companies. This means we get slower growth today and tomorrow, and we threaten future wage growth and our ability to compete with foreign companies.

Exports of goods and services have slowed for many reasons but primarily because many of our trading partners have not recovered or remain in recessions after the global recession. These foreign purchasers are not buying goods and services at home – and they are not buying from us.  

Interest rates and the value of the dollar have been rising. This is no surprise mostly because of the relative strength of the US economy. If interest rates rise appreciably more this could dampen investment spending further; if the dollar continues strengthening this might jeopardize exports.

Lackluster economic growth has also impacted poverty. The official US poverty rate in 2015 fell to 13.5% of the population – down from 14.8% in 2014 but is still higher than in 2007 (12.5%) and 2000 (11.3%).

Debt is also of concern. The Federal government’s debt threatens to reach more than 100% of the economy. Student debt has reached new peaks with little sign of abatement or payment. Similarly, mortgage debt is getting bigger and riskier.

This “photo” of the US economy today is where we have come to in early 2017. Is it complete? I doubt it. Does it foretell a disastrous future? I don’t think so. Is it where we want it to be? I don’t think so.

But I do think it wouldn’t hurt to have this story in the back of our minds as we contemplate and debate remedial actions in the days ahead. No matter what other issues we try to solve, we should at least not make these economic trends worse. I don’t care to place blame or praise for today’s economy. I just want us to make it better.