Forget the Participation Rate

Originally published January 25, 2008

That’s what Chairman Jim Saxton (R-NJ) and his Joint Economic Committee advise anyway, and they seem to have a point. In their analysis of the merits of the various employment indicators in predicting recessions, they find that the participation rate with its laughable value of –161% is “actually bizarre” in that it tends to rise at the same rate during both expansions and recessions. That takes care of the booby prize. In terms of ability to predict recessions, balancing value and reliability, the initial UI series (weekly claims for unemployment insurance) ranked first, as did changes in the unemployment rate among the monthly indicators. Sad to say, the payroll and household series “are of no value as recession indicators.”

The Best
Series Value Reliability
Initial UI claims 76% 0.5
Employment/Population Ratio 51% 0.3
Continuing UI Claims 43% 1.8
Unemployment (CPS) 27% 0.8
Unemployment (MA) 15% 1.6
Unemployment (12M) 0% 2.5

The Worst
Series Value Reliability
Labor Force Participation -161% 0.1
Civilian Employment (MA) -80% 1.0
Payroll Employment (real time) -23% 1.3

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– Philippa Dunne & Doug Henwood