The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
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May 06, 2019
Improving Labor Force Participation
Without question, the U.S. labor market has tightened a lot over the last few years. But a shifting trend in labor force participation—and especially a rise in the propensity to seek employment by those in their prime working years—seems to be relieving some labor market pressure.
From the first quarter of 2015 to the first quarter of 2019, the labor force participation (LFP) rate among prime-age workers (those between 25 and 54 years old) increased by about 1.5 percentage points (see the chart below), adding about 2 million workers more than if the participation rate had not increased.
Changes in the distribution of the prime-age population in terms of age, education, and race/ethnicity toward groups with higher participation rates and away from groups with lower rates accounts for about a third of the rise in the overall prime-age LFP rate. The other two thirds can be pinned on an increase in LFP rates within demographic groups—what we call "behavioral" effects.
Of the increased participation behavior within demographic groups, there has been a decline in the share of the prime-age population that say they want a job but are not actively looking for work at the moment. We refer to these individuals as the "shadow labor force" because even though they are not in the labor force this month, they have a relatively high propensity to have a job next month. Second, there's been a decline in the share of the prime-age population that are not participating because they are too sick or disabled to work. The contribution of the change in behavior in these two categories (as well as several others from the first quarter of 2015 to the first quarter of 2019) are shown in the following chart, which is taken from the Atlanta Fed's Labor Force Participation Dynamics tool.
In contrast, consider the period from the first quarter of 2008 through the first quarter of 2015, a time when the rate of prime-age LFP declined by almost 2 percentage points. During that period, even though slow-moving demographic changes were putting modest upward pressure on the prime-age participation rate, that support was more than swamped by negative changes in participation rates within demographic groups. The following chart shows the relative contributions of these behavioral changes.
Within demographic groups, the increased incidence of being too sick or disabled to work stands out as the largest contributor to the decline in prime-age labor force participation between 2008 and 2014.
Since 2014, prime-age LFP has benefited from the movement of both demographics and participation behavior. But so far, less than half of the overall behavioral decline between 2008 and 2014 has been reversed.
Though demographic trends are likely to remain positive, how much more participation behavior—especially as it is related to disability and illness—can shift as the labor market tightens remains unclear. The share of the prime-age population too sick or disabled to work had been on a rising trend for the decade prior to the last recession, suggesting that there may be some deeper and structural health-related issues that could keep the disability/illness rate elevated despite an increasingly tight labor market.
March 26, 2019
Young Hispanic Women Investing More in Education: Good News for Labor Force Participation
In a recent recent macroblog post, my colleague John Robertson found that the recent rise in female prime-age (ages 25 to 54 years) labor force participation (LFP) over the last few years has been driven in large part by increased participation among Hispanic women. (Hispanic refers to people of Cuban, Mexican, Puerto Rican, South or Central American, or other Spanish culture or origin regardless of race.) Much of the LFP improvement among Hispanic women has come as they've shifted away from household duties.
To understand this development and determine whether it's a trend likely to continue, we look at trends in the activities of younger Hispanic women. In particular, we look at the so-called NEETs rate among women ages 16 to 24. The NEETs rate is the share of the youth population that is "Not Employed or pursing Education or Training." This group is sometimes referred to as "disconnected youth" or "opportunity youth" because they are generally less likely to be attached to the labor force as they move into their prime working years and are at higher risk of experiencing long-term unemployment, persistent poverty, poor health, and criminal behavior.
A look at the next chart shows substantial improvement in the NEETs rate among young Hispanic women over the last two decades. The gap has narrowed considerably and in recent years has tracked much more closely with black non-Hispanic women.
The declining NEETs rate for young Hispanic women primarily reflects shifting preferences toward more education and away from household responsibilities. As you can see in the next chart, the share of young Hispanic women who are in education or training has risen over the last two decades, up nearly 19 percentage points since 2000. Their share now more closely matches that of young black and white non-Hispanic women.
Mirroring the rise in educational activities has been a shrinking share of young Hispanic women who are not in the labor force because they are taking care of home or family, as the following chart shows.
Young Hispanic women have invested increased time in their education over the last two decades and as a result have higher average levels of educational attainment than earlier cohorts moving into their prime working years. To see this, the next chart shows the distribution of educational attainment over time for Hispanic women aged 25.
The higher levels of LFP in recent years among prime-age Hispanic women partly reflects the greater investment in education by younger Hispanic women. If this trend continues—and there is no obvious reason why it wouldn't—then it will help drive even higher labor force attachment for prime-age Hispanic women in the years to come.
March 22, 2019
A Different Type of Tax Reform
Two interesting, and important, documents crossed our desk last week. The first was the 2019 edition of the Economic Report of the President. What particularly grabbed our attention was the following statement from Chapter 3:
Fundamentally, when people opt to neither work nor look for work it is an indication that the after-tax income they expect to receive in the workforce is below their "reservation wage"—that is, the minimum value they give to time spent on activities outside the formal labor market.
That does not strike us as a controversial proposition, which makes the second of last week's documents—actually a set of documents from the U.S. Department of Health and Human Services (HHS)—especially interesting.
In that series of documents, HHS's Nina Chien and Suzanne Macartney point out a couple of things that are particularly important when thinking about the effect of tax rates on after-tax income and the incentive to work. The first, which is generally appreciated, is that the tax rates that matter with respect to incentives to work are marginal tax rates—the amount that is ceded to the government on the next $1 of income received. The second, and less often explicitly recognized, is that the amount ceded to the government includes not only payments to the government (in the form of, for example, income taxes) but also losses in benefits received from the government (in the form of, for example, Medicaid or child care assistance payments).
The fact that effective marginal tax rates are all about the sum of explicit tax payments to the government and lost transfer payments from the government applies to us all. But it is especially true for those at the lower end of the income distribution. These are the folks (of working age, anyway) who disproportionately receive means-tested benefit payments. For low-wage workers, or individuals contemplating entering the workforce into low-wage jobs, the reduction of public support payments is by far the most significant factor in effective marginal tax rates and the consequent incentive to work and acquire skills.
The implication of losing benefits for an individual's effective marginal tax rate can be eye-popping. From Chien and Macartney (Brief #2 in the series):
Among households with children just above poverty, the median marginal tax rate is high (51 percent); rates remain high (never dipping below 45 percent) as incomes approach 200 percent of poverty.
Our own work confirms the essence of this message. Consider a representative set of households, with household heads aged 30–39, living in Florida. (Because both state and local taxes and certain transfer programs vary by state, geography matters.) Now think of calculating the wealth for each household—wealth being the sum of their lifetime earnings from working and the value of their assets net of liabilities—and grouping the households into wealth quintiles. (In other words, the first quintile would the 20 percent of households with the lowest wealth, the fifth quintile would be the 20 percent of households with the highest wealth.)
What follows are the median effective marginal tax rates that we calculate from this experiment:
Median Effective Marginal Tax Rate
Consistent with Chien and Macartney, the median effective marginal tax rates for the least wealthy are quite high. Perhaps more troubling, underlying this pattern of effective tax rates is one especially daunting challenge. The source of the relatively high effective rates for low-wealth individuals is the phase-out of transfer payments, some of which are so abrupt that they are referred to as benefits, or fiscal, cliffs. Because these payments differ widely across family structure, income levels within a quintile, and state law, the marginal tax rates faced by individuals in the lower quintiles are very disparate.
The upshot of all of this is that "tax reform" aimed at reducing the disincentives to work at the lower end of the income scale is not straightforward. Without such reform, however, it is difficult to imagine a fully successful approach to (in the words of the Economic Report) "[increasing] the after-tax return to formal work, thereby increasing work incentives for potential entrants into the labor market."
March 06, 2019
X Factor: Hispanic Women Drive the Labor-Force Comeback
The share of the prime-age population engaged in the U.S. labor market is on the rise, led by a sharp rebound in the labor force participation (LFP) rate by prime-age female workers (those ages 25–54). This point was highlighted in a recent Wall Street Journal article.
Since 2015 the LFP rate for prime-age women has increased by about 1.8 percentage points, reversing an almost 16-year slide. Using the data underlying the Atlanta Fed’s new Labor Force Participation Dynamics tool, some of the factors behind this increase become apparent. Of particular note is that Hispanics (people of Cuban, Mexican, Puerto Rican, South or Central American, or other Spanish culture or origin regardless of race) account for a bit less than one-fifth of the prime-age female population, but they accounted for almost two-thirds of the increase in female LFP during the last three years. This increase was the result of both a rising share of the population that is Hispanic and the rising LFP rate among Hispanic women. The share of the prime-age, Latina population increased by 1 percentage point between 2015 and 2018, and the LFP rate for this group increased 3 percentage points. (The reason why rising Hispanic LFP didn’t result in the overall female LFP rate increasing by more than 1.8 percentage points is because Hispanic women are still 8 percentage points less likely to be in the labor force than non-Hispanic women. But this participation gap is closing rapidly.)
The Atlanta Fed’s web tool also allows us to further explore what is behind the 3 percentage point LFP rate increase for prime-age Latinas in the last three years. (My Atlanta Fed colleague Ellyn Terry provides a longer-term view on Hispanic female labor force dynamics in this related macroblog post.) It’s particularly noteworthy that almost two-thirds of the recent increase is the result of a decline in family or household responsibilities keeping people out of the labor force (see the chart).
This shift away from household duties is attributable to a combination of the shifting demographics of the Hispanic population (such as being more likely to have a college degree and thus obtaining a higher-wage job and being better able to afford child care) and a lower propensity to not participate for family reasons within Hispanic age and education groups.
The rebound in female LFP in the last three years is good news, with rising wages, particularly at the low end, and higher demand in traditionally female-dominated occupations contributing to the increase. But making the labor market a truly viable option for women still poses a number of challenges. The LFP rate of U.S. women has fallen behind that of many other countries, many of which have enacted family-friendly policies to help support women in the workplace.
- Improving Labor Force Participation
- Young Hispanic Women Investing More in Education: Good News for Labor Force Participation
- A Different Type of Tax Reform
- X Factor: Hispanic Women Drive the Labor-Force Comeback
- Tariff Worries and U.S. Business Investment, Take Two
- Trends in Hispanic Labor Force Participation
- Quantitative Frightening?
- Are Employers Focusing More on Staff Retention?
- Defining Job Switchers in the Wage Growth Tracker
- Cryptocurrency and Central Bank E-Money
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