Tuesday, April 9, 2013

What Does the Nation’s Declining Employment-Population Ratio Really Reflect?

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As unemployment rates across the nation (and here in Utah) continue to drop, many media pundits have turned to the employment-population ratio to find their daily dose of economic gloom and doom. (Of course, by providing negative news, they are just supplying what the public appears to demand.) However, is the shrinking employment-population ratio really bad economic news?

The employment-population ratio is a figure produced by the Bureau of Labor Statistics. Just like the unemployment rate, it is generated from responses to the Current Population Survey (or CPS in acronym parlance). It represents the percent of the population 16 years and older that is employed. Kind-of, sort-of the yin to the unemployment rate’s yang. For example, one commentator, indicates that the fact that the employment-to-population ratio has declined “paints a much bleaker picture of the job market than the unemployment rate.”

Is this true? On the surface, indeed the employment-to-population ratio has declined noticeably since the recession began. But before we paint too bleak a picture, let’s outline the major reasons why the ratio is declining

The Bottom Line?

The decline in the employment-population ratio began long before the current recession.

• An increase in unemployment during the recession resulted in a sharper downturn during the recession, but that effect is moderating as the economy expands.

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• The primary cause of the continued decline in the employment-population ratio is decreasing labor force participation among teenagers (16-19 years old) and young adults (20-24 years old).

• Labor force participation has actually increased for workers 55 years and older.

• The shrinking of the population in the prime workforce years (35-44) also plays a role in the overall drop in the employment-population ratio.

• Finally, the decline in the employment-population ratio is primarily due to less labor force participation among young people and the aging of the baby-boom and baby-bust generations.

If you are interested in a fuller (and longer) explanation, read the narrative after the "jump."

 What are the factors currently influencing the employment-to-population ratio?

Unemployment—the very fact that unemployment increased during the recession would cause the employment ratio to decline.

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Labor Force Participation—this figure is the percentage of civilian, noninstitutional population over the age of 16 who are “participating” in the labor force. In other words, these folks are employed or considered “unemployed” which requires some sort of active work search. Those who have removed themselves from the labor force for whatever reason—school, home responsibilities, retirement, health, discouragement, etc. will not be counted in labor force.

Demographics—particularly age. Some age groups are more or less likely to participate in the labor force or have higher or lower unemployment rates. For example, the very old and the very young are less likely to be in the labor force. Changing population shares of different age groups will affect the overall employment-to-population ratio.

The employment-population ratio started to edge down long before the recession began. (Chart 4.)

The recessionary drop for men proved sharper than for women. This makes sense since men typically show higher unemployment rates during an economic downturn. Men are more likely to be employed in industries hardest hit by recession—manufacturing, construction, etc.
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Employment ratios for those over 55 have actually increased in recent years and are higher now than in 2002. This probably due to less early retirement. The recessionary decline in 401ks and other investments may have caused older workers to defer retirement. On the other hand, baby-boomers may just be following through on their polled intention to keep working later than earlier cohorts. (Chart 2)

The largest declines in employment-population ratios are exhibited by the youngest workers. In particular, teenagers are much less likely to be employed in 2011 than in 2002 (Chart 2).

This decline in the employment-population ratio tracks with the decline in participation rates for young people. Again, this drop occurred long before the recession began. Participation rates for teenagers have slipped from 47 percent to 34 percent in less than a decade. More school attendance may be to blame. However, this contraction in labor force participation may also reflect a change in cultural values regarding teenagers and work.

Traditional economic theory may also provide a bit of an answer to the dwindling labor force participation among teenagers. Young people are disproportionately more likely to work for minimum wage. Economic theory indicates that if a price floor (such as a “minimum wage”) is higher than the natural market wage rate, fewer jobs will be available for those workers. Recent notable increases in minimum wage may be forcing young people out of the labor market.

Of course, participation rates for those 20-24 years of age have also fallen from 76 percent in 2002 to 71 percent in 2011. Increased full-time school attendance seems the most likely reason behind this change.

On the other hand, participation rates for workers over 55 years of age increased over the same time period. Participation rates for the age groups representing the bulk of workers—25 to 54 have also declined over the past decade. However, this slip occurred long before the most current recession and kept on dropping right through the “boom.”

In addition, the civilian population for most age groups has increased in the last ten years. Growth has been particularly strong in cohorts which include baby-boomers (no surprise here). However, the population in the prime working years—35 to 44 has declined steadily as baby-boomers left the age group to be replaced individuals from the baby bust. This age category accounted for 20 percent of the

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