The Richmond Fed’s Take on Unemployment and Participation Rates

In their economic brief, “Comparing Labor Markets across Recessions: A Focus on the Age Composition of the Population,” Richmond Fed researchers Marianna Kudlyak, Devin Reilly, and Steven Slivinski find that controlling for the recent decline in teenagers’ participation rate produces an unemployment rate of 11.3%, a new post-war high, and that much of the decline in the overall participation rate has been driven by the increasing percentage of workers 55 and older. Things are what they are, and you have to be careful about making this kind of adjustment, but this is Fed research and we are taking it seriously.

Setting the stage, they find that although the 2008 contraction in output was comparable to those of the 1957 and 1973 recessions (the prior record-setters), the 7% decline in employment was more severe than any other post-WWII recession. The 2% decline in weekly hours in the 2008 recession was not as severe as 1969’s 3%, or 1973’s 2.1%, but aggregating hours worked with employment produces a 9% decline, far worse than 1948’s 5.7%, the previous record.

For their next comparison, they assume that the recovery began when Nonfarm Business Sector output turned positive, Q309 for the current recovery, and find that employment growth is lagging prior recoveries.  Of the ten prior recoveries considered in the paper, employment continued to decline during the first two quarters of the recoveries following the 1957, 1960, 1991 and 2001 recessions, but percent declines were larger than the current decline (1.35%) only following the 2001 recession (1.8%) Positive note: Unlike the 2001 recession/recovery, weekly hours showed modest growth during the second quarter of the current recovery.

Noting that looking at labor indicators without adjusting for demographics, “may not be the best way to compare recessions,” they adjust for teenagers’ diminishing and the over-55 set’s growing share of the work-force. In 1982, when unemployment hit 10.7%, its post-war high, teenagers constituted 7.6% of the workforce; in 2009, their share had dropped to 4%.  This may be a good thing in the long-run as there is anecdotal evidence suggesting that teens are staying in school longer, and it is definitely a good thing for the unemployment rate. Teens have a volatile and high rate of unemployment, so Kudlyak et al. adjust the current rate by holding the teenagers’ participation rate constant since 1982, resulting in the postwar high of 11.3% mentioned above. They go on to say that the larger share of older participants in the labor force “means the ‘natural’ unemployment rate is lower than it as in 1982,” and that Q309’s 10% is “likely further” from the natural rate than was 1982’s 10.7%.

They apply the same technique to the labor force participation rate to determine how much of the current decline is cyclical and how much structural. Total participation was 58.6% in 1948, rose to 67.3% in 2000, and has declined since, hitting 64.7% in January 2010, with half of the decline occurring since December 2007. In March 2000, workers 55 and older constituted 26.8% of the working-age population, compared to 30.3% currently. Reconstructing the series using the current age composition replaces the long downward trend shown in the official series with a more modest decline that does not begin until mid-2009 and so far has only reached the level of mid-2005. Reconstructing another series that keeps 1999 participation rates constant across age groups, they show that in 2005 the official rate actually rose above what would have been predicted by demographic changes, and has only recently fallen below, suggesting that much of decline since 2000 is structural.

Their conclusions are a bit contradictory: the high unemployment rate of this cycle is “much higher in relative terms,” than those of prior recessions, meaning there is a great deal of slack in the labor force but, since there has been less of a cyclical decline in the participation rate, there may not be as many workers outside the labor force ready to step in as the recovery continues as in prior cycles.

Economic Brief with a number of graphs here:

Philippa Dunne & Doug Henwood

by Philippa Dunne· · 0 comments · Fed Focus