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Jobs jobs jobs

It's the demographics, stupid

By Daniel P. Collins

September 8, 2014

Back in January I posed a question regarding the health of our economy and the job market. Finally a new study has attempted to answer it.

For years there has been a debate raging about the health of the job market. The headline unemployment rate has dropped substantially from the peak of the credit crisis, but many analysts point to the fact that the overall participation rate has shrunk considerably as discouraged workers have given up looking for jobs.

They claim that the drop in the headline unemployment rate from 10% at the peak of the recession in October 2009 to 6.1% as of the August 2014 employment situation report is more due to the shrinking denominator of eligible workers than an improved economic condition and the number is distorted.

While there is some truth to that, the nonfarm payroll number seems at odds with the unemployment rate because, in times of recovery, when the economy typically adds several hundred thousand jobs per month, the headline unemployment rate sometimes ticks up. This is because more people are joining the labor force. In recent years, however, the headline rate has dropped more in line with the nonfarm payroll numbers even though job growth has not been as robust as in other recoveries.

The numbers back this up as the labor force participation rate has fallen from about 66% of the population in 2007 to 62.9% in the first half of 2014.

Unfortunately, this debate has been hijacked by those political forces that simply want to portray a better or worse economic condition for their own purposes.  This is not just about politics, or it shouldn’t be. The various statistical numbers that the market relies on are more than just a way of keeping score. The Federal Reserve sets policy based on the results, and it is not good to play with numbers to make your guy look good or your opponent to look bad.

That brings us back to how we should view the data and my question. The answer lies somewhere in between those who only look at the headline number and those who believe those numbers are distorted—and now there is some research to back this up.

No one would mistake our economy over the last few years as robust, but we have known for decades that the massive baby boom generation would start retiring en masse in 2011, and logically that would have an effect on the labor participation rate. A recent study by the Federal Reserve’s Divisions of Research & Statistics and Monetary Affairs, titled “Labor Force Participation: Recent Developments and Future Prospects,” indicates that demographics may have more to do with the participation rate than economic conditions.

It notes, “To an important extent, this decline in the labor force participation rate likely reflects the ongoing influence of the aging population that was (the focus of a 2006 Brookings Paper)… [which] predicted further declines in the participation rate over the subsequent decade as the population continued to age and the baby-boom generation continued to enter their retirement years.”

However, the study also notes that “population aging cannot account for the entire decline in the aggregate participation rate.”

My question was: if back in the 1990s there was a standard held belief that nonfarm payrolls need to grow by roughly 150K a month for the overall employment rate to break even, what should that figure be today now that thousands of baby boomers are retiring every year?

One reader agreed with the premise noting, “Almost a million more people per year are retiring and receiving SSI benefits than 11 years ago. 7.1 million more are on SSI.”

He even supplied some statistical proof of this.

The Fed’s study addressed my question directly, “Another implication is that, as the growth in the labor force slows, the 'break-even' level of monthly job gains required to hold the unemployment rate unchanged month-to-month will be lower than decades past. By our calculations, over the next decade somewhere between 50,000 and 75,000 jobs per month will be needed to maintain an unchanged unemployment rate, well less than the amount needed in the 1990s.”

So there you have it. Obviously some will take issue with this conclusion,, and actual numbers are dependent on many factors that are not static, but this may change our view of what constitutes a good and bad number.

With so much emphasis by the markets and policy by the Federal Reserve based off of this set of numbers, it is important to move its reporting above politics and see what they truly show us.