Over at Equitable Growth: In Which I Make Myself Very Confused About Cyclical Recovery: Monday Focus for August 18, 2014
Over at Equitable Growth: Will somebody please tell me that I have made a gross arithmetic error in what is below, and can be much more optimistic?
Let me start with this graph:
Perhaps a few more 25-54 year olds are in school today than in 2000 or 2007. But only a few. As best as I can see, no more 25-54 year olds are having kids than in 2000 or 2007. And only a very few more 25-54 year olds are staying home to care for elderly relatives than in 2000 or 2007. But I look at this graph--my standard graph for trying to ascertain the cyclical- and hysteresis- state of the U.S. labor market without confusing the demographic effects of population aging with those of the
Great Recession Lesser Depression of 2008-?. I see a huge excess decline in participation driven by "hysteresis" that is permanent damage to economic potential produced by the catastrophe. And I see, over and above that, only 1/3 of the work accomplished of cyclical recovery back to a normal spread between prime-aged participation and prime-aged employment.
Thus I really do not understand the triumphalism of the very sharp Steve Braun et al. from the CEA here:
Steve Braun et al.: The decline in the labour force participation in the US: In part due to the vigorous, multi-front response...
...to the economic crisis, the US has enjoyed a sustained economic recovery that has exceeded most contemporaneous and historical financial crisis benchmarks. Up until a year ago, the unemployment rate was falling by an average of 0.7 percentage points per year, roughly tracking the more successful historical experiences, and well exceeding the norm following a financial crisis. In the past year, the pace of the decline in the unemployment rate has doubled. As a result, the official unemployment rate is 83% of the way back to its pre-Global Crisis average. A variety of other indicators--such as broader measures of labour market underutilisation that include discouraged workers or marginally attached workers as well as unemployment rates for different demographic groups--show similar magnitudes of recovery...
So the labor market is, they say, 5/6 of the way back to normal--the current unemployment rate of 6.2% is 3.8%-points down from the peak of 10.0%, and has only 0.8%-point left to go before it hits a pre-crisis NAIRU of 5.4%. When it does, we will attain a "cyclically normal" labor market with a participation rate at 63.4%, 0.5%-points higher than today's 62.9%, and an associated employment-to-population ratio of 60.0%.
By that metric, we have done 3/4 of the work of cyclical recovery: from a 5.5%-point gap between employment and participation at the trough to a 3.9%-point gap now and a 3.4%-point gap at NAIRU. We will have made 1.7%-points back from the trough on the employment-to-population ratio when cyclical recovery is complete. The permanent damage to employment from the
Great Recession Lesser Depression appears to be less than 0.9%-points of participation because there are also ongoing "cohort effects unrelated to aging" that reduce participation.
Let me stress that this is not senior and not-so-senior White House officials under pressure from political operatives putting as positive a spin on things as they can without actually losing their... No: what I mean to say is this: this is what the CEA's Steven Braun, John Coglianese, Jason Furman, Betsey Stevenson, and Jim Stock actually believe is true about the world--that the labor market is recovering successfully and strongly from the disaster of 2008-9.
But I look at 25-54. The employment rate is down from 79.9% in 2007 to 76.6% in July 2014--3.3%-points less, compared to 4.0%-point a fall from 63% to 59% over the entire population. The participation rate is down from 80.8% in July 2014 compared to 83.1% for 2007--2.3%-points, compared to the 3.1%-point fall from 66.0% to 62.9% over the entire population.
A normal NAIRU spread would put the 25-54 employment-to-population ratio at 78.7%, 2.5%-points below the 81.2% cyclically-adjusted 25-54 participation ratio. When cyclical recovery is complete, we would then expect to make back 3.7%-points back from the trough on the 25-54 employment-to-population ratio. So far we have made back only 1.0%-point.
So which is it? Has hysteresis done 1.8%-points of damage to 25-54 employment or 0.9%-points to total employment? Have we done 3/4 of the work of recovery relative to the proper labor force-trend share benchmark? Or have we done only 1/3 of the work of recovery?
The 25-54 data and the economy-wide aging trend-adjusted data used by the CEA appear to be telling us very different things both about the cyclical state of the labor market and about the damage done by hysteresis. How to reconcile? Which is right?