Employment-Population ratio

Torsten Slok keeps making interesting graphs, which make a blogger's job easy.


Lately, there has been a pretty remarkable consensus among macroeconomists that the labor market really is not doing well, despite lower unemployment rate. About 10 million people lost their jobs in the great recession,  and new employment has just about matched new people since then. The employment-population ratio -- red line -- hasn't budged. The 10 million aren't actively looking for work, so they don't count as "unemployed." Whether "discouraged" by persistent "lack of demand" or discouraged by high marginal taxes and social program disincentives, or bad match of skills and opportunities, take your pick, the consensus view on all sides has been pretty dim on the labor market.  I've seen about the same slide deck from Ed Lazear (Bush CEA chair) and Larry Summers (Obama adviser). Usually, employment and unemployment mirror each other, so it doesn't matter which measure you use.

In Torsten's view, there is nothing the Fed can do about this. I agree. The Fed seems to secretly agree too. They talk about the employment-population ratio, but if they thought there were effectively 10 million unemployed and they could do something about it, they would not be even talking about tapering, they'd be talking about buying another $2 trillion of bonds and promising zero rates into the 7th year of the Hilary Clinton administration.

But to the point of the graph: apparently, the share of 25-54 year olds mirrors this long-run trend in employment-population ratio. In Torsten's view, the 55-65 year olds made a lot of money in their 401(k)s and are retired. (The range of the vertical axes is the same, so though not quite counting people, it's close. Beware correlations among series with different vertical axes!)

I'm not quite so optimistic. The average $650,000 net worth Torsten cites is nowhere near enough to live on for 30-35 years, much of this is in housing, and half the households have less. As a member of that demographic, I think there is a lot of useful work to be had out of 55-65 year olds. The same numbers can be read dreadfully as a generation whose location, skills, health insurance arrangements, marginal tax rates (social security disability, etc.) and now long-term unemployment history leave them behind, facing a long painful old age, and the economy without their contributions.

Still, I hadn't really been thinking about demographics in the context of the employment-population ratio, and it's important. Long-run growth of the economy and tax revenue needs overall employment to rise. If the 55+ are forever out of the labor force, we'd better let some young smart taxpayers in pretty fast!