Thursday, February 13, 2014

Is the Employment/Population Ratio Decline As Big a Problem As It Looks?

Employment is down. A lot.

Many people attribute this to the Great Recession. Poke around a little with the search tool to the right, and you’ll see that I’ve been pushing the idea on this blog for a few years that we’re in the midst of a long-term demographic wave: it peaked in the mid-90’s, and participation has been declining ever since. I attribute this to the baby boomlet (sometimes called the echo boom). The raw data looks like this:


That looks like a pretty serous case for a bunch of people dropping out of the labor force due to the Great Recession, and not coming back (presumably because of the weak expansion).

Not so fast argue economists from the Federal Reserve Bank of New York. The broke down the population into 280 cohorts: basically, fractions of the population assumed to act about the same way. For example, I might be grouped with white males born in 1964. They then modeled the employment/population ratio for each of those groups, and aggregated them up. And here’s what they got:


The first chart corresponds roughly to the rightmost third of this chart.

What they found is that the effect of the Great Recession is still there, but it’s quite small: the red line is less than 1 percentage point below the blue curve where it’s estimated that it should be.

The Great Recession (and Weak Obama Expansion) really has 3 components: 1) a drop from supernormal employment, 2) a comparable drop of employment below average, and 3) a recovery that is non-existent but shouldn’t be expected to be that big anyway.

One other salient feature to take away from this work is that our collective memory of what normal used to be is conditioned by the 13 years of above normal employment, running from 1994 to 2008. We should be above average about half the time, but this extended period no doubt has colored our perception of what is normal in a direction that isn’t very helpful when we come down to Earth.

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