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March 31, 2006
More On Labor Force Participation Rates
In today's Wall Street Journal (page A2 in the print edition), Greg Ip reports on a study by the Federal Reserve Board's Stephanie Aaronson, Bruce Fallick, Andrew Figura, Jonathan Pingle and William Wascher, wherein the authors join the growing consensus that low labor force participation rates may not be a sign of labor market weakness after all. The basic conclusion, from the Aaronson et al paper:
A key question is whether the decline in the participation rate since 2000 primarily reflects cyclical forces—the tendency for individuals to withdraw from the labor force during periods of reduced job opportunities—or longer-lasting structural influences...
On balance, the results suggest that most of the decline in the participation rate during and immediately following the 2001 recession was a response to business cycle developments. However, the continued decline in participation in subsequent years and the absence of a significant rebound in 2005 appears to reflect other more structural factors. Indeed, the current level of the participation rate is close to our model-based estimate of its longer-run trend level, suggesting that the current state of the labor market is roughly neutral for the participation rate.
This is exactly the point I was trying to make awhile back. If you want characterize the performance of US labor markets in 2001 and 2002 in terms that connote anything better than lousy, you have a tough sale to make. But the perception that the labor market substantially underperformed relative to its potential over the past three years looks increasingly like a mistaken impression. It may be about time to start rewriting that little bit of recent economic history.
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