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February 06, 2014

A Prime-Aged Look at the Employment-to-Population Ratio

Trying to interpret changes in labor utilization measures such as the employment-to-population ratio is complicated by the fact that they do not refer to the same set of people over time. The age composition of the population is changing, and behavior can vary across and within age cohorts.

This issue is illustrated in a recent New York Fed study of the employment-to-population ratio by Samuel Kapon and Joseph Tracy. This ratio nosedived during the recent recession by about 4 percentage points and has barely budged since.

This measure of labor utilization is the clear laggard on any labor market recovery dashboard. But the authors show that it is not so clear that the employment-to-population ratio is really so far from where it should be, once you control for the fact the employment rates tend to be lower for younger and older people and that the age composition within the population has shifted over time. This idea is similar to the one used to estimate the trend labor force participation rate in this Chicago Fed study by Daniel Aaronson, Jonathan Davis, and Luojia Hu. The issue of controlling for dominant demographic trends is one of the reasons we at the Atlanta Fed decided not to feature either the overall employment-to-population ratio or the overall labor force participation rate in our Labor Market Spider Chart.

A simple, and admittedly crude, alternative to computing the demographically adjusted employment-to-population ratio trend is to look at a segment of the population that is on a relatively flat part of the employment (or participation) rate curve. A common standard for this is the so-called prime-aged population (people aged 25 to 54). These individuals are less likely to be making retirement decisions than older individuals and are less likely to be making schooling decisions than younger people. Of course, this approach doesn't control for within-cohort factors like educational differences.

So what do we find? The prime-aged employment-to-population ratio declined almost 5 percentage points between the end of 2007 and 2009 (versus 4 percentage points overall) and since then has recovered about 25 percent of that decline. Using the end of 2007 as reference, the Kapon and Tracy trend estimate has declined about 1.7 percentage points, which implies the overall employment-to-population ratio, by not continuing to decline, has improved by about 40 percent.

Then what does the analysis say about labor utilization in the wake of the recession? Once demographic factors are controlled for, both aforementioned measures indicate that labor-resource utilization has improved relative to trend. In fact, as Kapon and Tracy note, the relative improvement would be even greater if you believed that employment was above trend before the recession.

Photo of John RobertsonBy John Robertson, a vice president and senior economist in the Atlanta Fed's research department


February 6, 2014 in Employment, Labor Markets, Unemployment | Permalink

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Comments

Prime-age recovered about 25 percent of that decline...so what is the overall recovery (if any) if you include under 25 and over 54?

I'm trying determine why some are saying the decline (since 2000) was because of Boomers retiring (even though the first didn't retire until 2008 at age 62).

Many over-50ish workers who lost jobs since 2007 were never rehired again, but were too young to take a pension or early Social Security retirement. Most likely they are among the millions of so-called "discouraged workers".

So if demographics were being used, it should not be said the decline was because "people were retiring", but instead should be noted that employers consider them to be obsolete widgets, and don't want them any longer.

Posted by: Bud Meyers | February 07, 2014 at 11:21 AM

The labor force increase has barely kept pace with new entrants even when you all try to show it in its best light. The country needs to face up to permanent loss of jobs due to the rapid pace of technology. And the more we dumb down the educational system with hair brained Washington schemes like common core we weaker employment figures will become.

Posted by: august mezzetta | February 07, 2014 at 05:40 PM

I have determined that young "non-starters" into the labor force (high school and college graduates) and discouraged workers (who are mostly prime-age workers) make up most of the recent decline in the labor force.

Birth rates are currently historically low, so those who are already within the population are graduating from high school at a faster pace than births, and more so than those who are retiring (now at record highs) or those going of disability (which recently have actually declined).

Note: Although disability "claims" have greatly risen since the last recession, actual "awards" for year-to-year net increases are tiny compared to retirees and high school graduates.

At this time, we can not compare job growth to population growth, as it's not relative to maintaining the labor force participation rate or the employment-to-population ratio.

My post with links to data here:

http://www.economicpopulist.org/content/record-number-boomers-left-labor-force-5523

Another post as a follow-up: "Prime Age Workers: Bulk of Discouraged Workers"

http://bud-meyers.blogspot.com/2014/02/prime-age-workers-bulk-of-discouraged.html

And this: "22% of all U.S. Households had no Earners" ---- Maybe someone with a higher pay-grade can reconcile those numbers ;)

http://bud-meyers.blogspot.com/2014/01/22-of-all-us-households-had-no-earners.html

And from another post: "8 Million Jobs Short, 6 Million Missing Workers" to show the numbers from the Economic Policy Institute—but they appear to be far too conservative. (I'd say at least 20 million jobs short and 20 million missing workers.)

http://bud-meyers.blogspot.com/2014/02/8-million-jobs-short-6-million-missing.html

* Note: There were a couple of minor discrepancies in the SSA data for year-to-year numbers in gains for disability (from two different links at SSA), and one explanation might be that one is the number of "awards" not yet in payment status. After an award is first granted, there is usually a waiting period before a payment is made. But the discrepancy is only minor.

Posted by: Bud Meyers | February 13, 2014 at 11:26 PM

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