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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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September 22, 2015


The ZPOP Ratio: A Simple Take on a Complicated Labor Market

In her press conference following the latest FOMC meeting, Federal Open Market Committee (FOMC) Chair Janet Yellen emphasized that she still sees cyclical weakness in the labor market, even as the headline unemployment rate has moved close to FOMC participants' median estimate of its longer-run normal level.

She also noted that FOMC participants look at many different indicators of labor utilization, because the headline unemployment rate (commonly known as the U-3 rate) is overstating the health of the labor market. One alternative measure that has received some attention is the employment-to-population (EPOP) ratio. However, a well-recognized problem with the EPOP ratio is that because it defines utilization as employment, trends in demographic and behavioral labor force participation can affect it.

This problem is partially addressed by looking at the EPOP ratio for the prime-age population, or by making adjustments for demographic changes as suggested by Kapon and Tracy at the New York Fed and further analyzed by our Atlanta Fed colleague Pat Higgins. Here, we propose an alternative approach that uses a broader definition of utilization that makes it less affected by labor supply trends.

The Current Population Survey does not ask the question "are your labor services being fully utilized?" Therefore, we have to use our judgment to classify someone as fully utilized. The figure below shows the choices we make. We assume that everyone who says they are working fewer hours than they want is underutilized (the red boxes). This includes those in the labor force but unemployed, those not in the labor force but wanting a job, and those working part-time but wanting full-time hours (similar to the treatment of underutilization in the broad U-6 unemployment rate measure).

Everyone working full-time, working part-time for a noneconomic reason, and those who say they don't want a job are considered fully utilized (the green boxes). Of course, this takes the "don't want a job" classification at face value. For example, someone who is retired is counted as fully utilized, irrespective of the (unknown) reason they chose to retire.

diagram of choices made in Current Population Survey

As shown in the Chart 1 below, the share of the population 16 years or older that is fully utilized—what we call the utilization-to-population (ZPOP) ratio—is currently about 1.5 percentage points below its prerecession level, after having fallen by 6 percentage points during the recession.

Chart 1: Z-Pop: The Share of the Population Fully Utilized

Notice that because the ZPOP ratio treats those who are not employed and don't want a job as fully utilized, it is less affected by demographic and behavioral trends in labor force participation than the EPOP ratio. (You can learn more on our website about how demographic and behavioral trends are affecting labor force participation.) When compared with the EPOP ratio, the ZPOP ratio paints a somewhat rosier picture of labor market conditions (see chart 2).

Chart 2: Z-Pop and the Employment-to-Population Ratio

Conclusion
In sum, the utilization-to-population (ZPOP) ratio is the share of the working-age population that is working full time, is voluntarily working part-time, or doesn't want to work any hours. According to this measure, about 91 percent of the working-age population is considered fully utilized. The remaining 9 percent are "underutilized" and are a roughly even mixture of the unemployed, those not in the labor force but wanting to work, and those working part-time but wanting full-time hours.

The headline U-3 unemployment rate is very close to its prerecession level but is thought to overstate the health of the labor market. At the same time, we think that the EPOP ratio overstates the amount of remaining labor market slack. The ZPOP ratio is in the middle; approaching its prerecession level but still with some way to go.


September 22, 2015 in Employment , Labor Markets , Unemployment | Permalink

Comments

Have you, recently or otherwise, discussed the actual data regarding falling labor force participation? The popular press and politicians say it's because geezers are "retiring". Yet the data, and a smattering of news pieces over the last few years, say quite otherwise. We geezers continue to work. No pensions, anymore.

Posted by: Drcoddwasright.blogspot.com | September 23, 2015 at 09:18 AM

Alas, I can't edit that comment, and your link didn't show clearly. So, here's the actual BLS data on LPR: http://www.bls.gov/emp/ep_table_303.htm

While the geezer rate is lower then younger, the rate itself has been rising, and is predicted to continue rising.

Posted by: Drcoddwasright.blogspot.com | September 23, 2015 at 09:29 AM

I've seen a bit of talk, recently I think through NBER, about the structural nature of the low/falling LFPR. I wonder whether prevailing economic conditions (specifically the general rate for compensation for one's low- or semi-skilled time) affects the way people answer whether or not they want a job in the first place.

Much like an improving economy attracts more people to the unemployment rolls, an improving wage floor may attract more people to want a job; the ZPOP might be improved by devising an additional variable to account for such a response.

Posted by: Bryan F | October 06, 2015 at 10:25 AM

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