A vehicle drives past the Marriner S. Eccles Federal Reserve building in Washington, D.C. (Photographer: Andrew Harrer/Bloomberg)  

Parsing the Fed's Labor Participation Puzzle

(Bloomberg) -- In the 2000 film Miss Congeniality, the beauty pageant contestant from Rhode Island is asked to describe her perfect date. She answers that it’s April 25 “because it’s not too hot, not too cold.”

Call this America’s April 25 economy (Federal Reserve presidents prefer “Goldilocks,” but variety is the spice of life). Unemployment is close to a 50-year low, wages are finally kicking higher, and inflation is contained right around the central bank’s 2 percent goal. Fed officials can put on a light jacket and take a victory lap, though one big point of confusion lingers: the participation rate.

The ratio of people working or looking for jobs as a share of the working age population had been trending down for years, and it fell sharply during the 2007-2009 recession. It seemed like America’s new non-participants were down for the count until 2015-2016, when the decline surprisingly stopped -- and then actually reversed for workers in the 25-54 age group.

Now policy makers and economists are trying to figure out whether that trend is sustainable and what it says about tightness in the labor market. Two studies on the topic make up the lead item in this week’s economic research roundup. The wrap also sums up a look at how climbing the German career ladder fosters income inequality and a study on a social and economic woe left over after China’s population management policies. Check this column each Tuesday for new and revealing economic research from around the world.

Participation Outlook

Parsing the Fed's Labor Participation Puzzle

Whither Labor Force Participation?
Published September 2018, Federal Reserve Bank of New York website

The rate at which people are finding jobs has inched higher as the labor market has tightened, and that’s pulling folks back into the labor market -- but the consequent flattening in overall participation may prove short-lived.

The share of people who are unemployed one month and have a job the next has popped to 28 percent from 24 percent in 2016, according to New York Fed researchers. Looking at state-level participation as well as job-finding and job-loss rates for four age groups, they find that a one percentage point increase in the job‑finding rate is associated with a 0.16 percentage point increase in the aggregate participation rate relative to its trend. Extending their analysis to the overall population and adjusting for aging, labor market tightening explains about 60 percent of the flattening of the participation rate since 2016.

But even if labor market conditions continue to tighten at the same rate as over the past eight years -- an optimistic scenario that pushes unemployment to 3.4 percent by 2023 -- headline participation would still fall as America’s population gets older. That’s because Americans are less and less likely to work as they near retirement age, and a big chunk of the U.S. population is moving into their late 50s and early 60s.

“Even a very robust labor market is unlikely to undo all the effects of an aging population,” the authors write. “A lower labor force participation rate seems likely to persist in the future.”

The Prime-Age Workforce and Labor Market Polarization
Published September 2018, San Francisco Fed website

Aging may explain the shape in the overall participation trend, but it does little to clarify what’s going on with the 25-54 prime-age group. They should be in the labor market sweet spot, but their rate also fell of sharply and has yet to recover to its pre-recession level.

San Francisco Fed researchers Rob Valletta and Nathaniel Barlow give a reason to expect that it will never fully rebound. State-level data suggest “half or more” of the participation decline since 2000 might owe to the disappearance of routine manual jobs, particularly in manufacturing, they write.

Other factors driving participation lower could include the rise of disability and increased opioid use, an increasing fraction of men with prison records, and improvements in the availability and quality of leisure pursuits, they write. The key conclusion, from the Fed’s perspective, is that underlying issues are driving the change. “It is unlikely that the contributions of these factors to low prime-age participation rates can be offset on a sustained basis by monetary and fiscal stimulus aimed at fostering a hot labor market.”

Polarized Climbers

Which Ladder to Climb? Wages of Workers by Job, Plant, and Education
Published September 2018, Minneapolis Fed website

Pay inequality widens dramatically with age, in large part because some workers do a better job climbing the career ladder. Progress into jobs with increased responsibility, complexity and independence explains 50 percent of wage growth and almost all of the rising wage dispersion over a working life, based on a Minneapolis Fed analysis of German pay data by University of Bonn researchers Christian Bayer and Moritz Kuhn.

This matters for the gender wage gap. At the start of their careers, women in the German data had hourly wages 7 percent lower than their male counterparts, but by the end of their careers, the gap had grown to 30 percent. Half of that came because female career progression slows drastically after the age of 30, while men continued to rise until their 50’s. Men also moved to better-paying employers, which accounted for a fifth of their wage gains over the course of their careers, while women moved to worse-paying employers after turning 30.

Unintended Consequences

China’s policies to discourage big families in the early 1970’s were effective -- and now both their costs and benefits are becoming evident. Because provinces implemented “later, longer, fewer” policies differently, researchers Yi Chen and Hanming Fang are able to show that parents who lived in areas with stringent family planning rules consumed more themselves and enjoyed better health. But as the parents grow older, they are left with fewer children to care for them and keep them company. Materially, that doesn’t seem to matter much: that could be because families with fewer children are able to save more, so they don’t need children to financially support them in old age. But mental well-being takes a hit.

“Whereas parents who are more exposed to the family planning policies consume more and enjoy slightly better physical health status, they report more severe depression symptoms,” the authors write in their National Bureau of Economic Research working paper. The effects are especially bad for mothers and rural parents. “Our study calls for greater attention on elderly people’s social network and mental health status.”

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