In looking at the 4.4 U3 Unemployment rate for April
2017, this would appear to reinforce the claim that the labor markets are
humming along just fine and would justify the Federal Reserve’s position on
driving up interest rates over the course of the next several months due to
inflationary pressures on wages. In
fact, the average U3 Unemployment rate was 5.0% from 2000 through 2007. So why is it that we are questioning the
health of the labor markets?
(yet again) the Labor Force Participation Rate (LFPR)
The Labor Force Participation Rate is calculated by
combining those employed with those unemployed actively seeking employment and
dividing that total by the Civilian Noninstitutional Population. As we’ve noted on several occasions, the LFPR
has fallen precipitously since 2008 and has not gained much traction.
The Current Population Survey is conducted by the U.S.
Census Bureau for the Bureau of Labor Statistics. On a monthly basis, 60,000 households are
surveyed and provide detailed information regarding individuals in that household
1) Civilian Noninstitutional Population (CNP) – 16+
years of age not in institutions (military, prison, etc.)
2) Civilian Labor Force – those individuals from the CNP who are either
employed or not employed but actively seeking employment (unemployed)
3) Not in the Civilian Labor Force – those individuals
in the CNP who are not part of the Labor Force [neither employed, nor actively
The survey itself is quite extensive, but we will
focus on specific labor market issues including the Labor Force Participation
Rate and the Employment-Population Ratio (Employed divided by the Civilian
Current Population Survey Questionnaire – Labor Force
It’s clear from the preceding chart showing the annual
changes in the Labor Force Participation Rate (LFPR) that massive numbers of
people left the labor force between 2008 and 2015. During that time, the LFPR averaged 18.2% on
an annual basis.
Here are a few questions that come to mind.
Is the collapse in the Labor Force Participation Rate permanent?
Can the LFPR return to pre-recession levels?
How could this occur?
Is it even feasible to see a return anywhere near the pre-recession level given
the growing size of 65+ age group
to the story: If the employment picture is so rosy, where have the 16 – 54 year
olds gone in the Labor Force?
It’s a plain fact that the Baby-boomers (those born
between 1946 and 1964) will continue to swell the ranks of 65 and over
set. Conventional wisdom dictates that
the labor force would naturally decline, based on increased numbers of people
no longer being employed or even seeking employment (unemployed). While that age group is for the most part
leaving the labor force in increasing numbers, the ratio of those staying is
surprisingly large and growing. We will
go into greater detail a bit later, but our primary focus will be on the
younger age groups or cohorts as they are referred to by the Bureau of Labor
Statistics and the Census Bureau.
Since the Baby-Boomers are moving into their
retirements and leaving job openings, it would make sense that the younger age
groups would be backfilling those vacancies and their Labor Force Participation
Rates would be moving in the direction of the pre-recession levels (2000-2007
The following table shows the continued shortfall in
the Labor Force for the prime earning years ages 16 - 54:
It would make sense that 1) the increased numbers of
the Baby-Boomers leaving the labor force would open up jobs for the younger age
groups; and 2) the Federal Reserve actions in driving up interest rates in
response ‘tight’ labor markets, would point to at least a return to
pre-recession levels, if not even more robust labor force participation rates
for the age groups 16 through 54.
The fact is that, based on pre-recession Labor Force Participation Rates for
the 16 to 54 year olds, we are clearly 5.0 million or more short of where the
Labor Force should be at this point if in fact we had returned to pre-recession
down on the Labor Force Participation Rate and Employment Population Ratio by Age
The Labor Force Participation Rate is measured by
taking the Employed plus those Unemployed (U3) who are actively seeking
employment and dividing that total by the Civilian Noninstitutional
Population. The Employment-Population
Ratio simply takes the Employed and divides it by the Civilian Noninstitutional
Population. In the following graphs we
will present material from the Current Population Survey as published by the
U.S. Bureau of Labor Statistics in conjunction with the U.S. Census Bureau.
In each age group from 16 through 54, you will notice
drop-off in the Labor Force Participation Rate without any significant
bounce-back. In terms of the Employment
Population Ratio, you will notice movement back toward pre-recession levels.
Force Participation Rate: 16 to 24 years old
reasonably expect to see improvements in the Labor Force Participation
Rate and the Employment-Population
It’s clear that the Federal Reserve is intent on driving up
interest rates, pointing to the reduction in the U3 unemployment rate. What should be clear at this point is that
both the Labor Force Participation Rate and the Employment-Population Ratio
levels are still well below Pre-Recession levels. Many experts attribute the decline to the
increasing number of people moving into their retirement years, but fact is
that the 55+ age groups are actually remaining in the workforce at increasing
levels, while the 16 through 54 year olds are still well below their
Pre-Recession levels in terms of the LFPR and the Employment-Population Ratio.
So long as we see improvement in terms of economic growth
(higher real GDP…much higher than 1st quarter 2017 0.7%) there is
little doubt that more people will be drawn back into the labor force. Keep in mind that the prospect of new jobs
will often cause the U3 Unemployment Rate to actually rise. This is referred to as the ‘encouraged worker
effect’ and happens when those people on the sidelines, not in the labor force,
are encouraged to once again seek employment.
We’ve actually seen this going on of late, but it has to continue on a
In an upcoming newsletter we will revisit the performance of
the economy over the last several years, including economic growth, price level
changes and we will once again summarize the employment picture. Our objective is to provide a baseline of
sorts by which to measure future economic performance.
We will have several more topics going forward and as always,
we welcome your feedback.