By Jonathan Spicer
NEW YORK, Feb 3 (Reuters) – A key measure of the U.S. labor
market appears to exaggerate the damage brought on by the Great
Recession, according to a fresh study by the Federal Reserve
Bank of New York, suggesting the job market may be closer than
previously thought to a full recovery.
The findings add to evidence that the retirement of baby
boomers could be playing a bigger role than previously thought
as Fed policymakers struggle to determine whether the dropping
unemployment rate is likely to lead to inflation sooner than
later.
Going a step further, if the labor market needs less policy
support, it could encourage the Fed to continue drawing down its
bond-buying stimulus and possibly even tighten policy more
quickly than planned.
New York Fed economists, including a top adviser to New York
Fed President William Dudley, analyzed demographic changes to
the employment-to-population ratio. That ratio dropped hard
during the 2007-2009 recession and has since remained stubbornly
low, suggesting to some that the labor market is much weaker
than the improvement in overall joblessness would suggest.
While U.S. unemployment has fallen to 6.7 percent from a
post-recession high of 10 percent, the employment-to-population
ratio (E/P) dropped more than 4 percent from its average in the
prior expansionary period and has remained there.
But the researchers, including New York Fed executive vice
president Joseph Tracy, found that when the E/P ratio is
adjusted for changes to demographics – such as the mass
retirement of baby boomers – it has declined. That in turn puts
pressure on the actual E/P ratio, suggesting that even though it
has remained low, the fact that it has held steady in the last
few years represents improvement in the labor market.
The findings add to evidence that the job market may have
permanently evolved in the wake of the recession, in large part
because of mass retirement.
“It is important to control for changing demographic factors
when looking at the behavior of the E/P ratio over time,” Tracy
and Samuel Kapon, a senior research analyst, wrote in the study.
These “demographic factors are exerting downward pressure on
the actual E/P rate, suggesting that the recent lack of
improvement in the E/P ratio does not imply a lack of progress
in the labor market,” they said.
“The adjusted E/P rate corroborates the basic picture from
the unemployment rate that the labor market has been recovering
over the past few years, but that it still has a ways to go to
reach a full recovery.”
A much-cited study by Philadelphia Fed economist Shigeru
Fujita found in November that the recent decline in the
participation rate – or the proportion of Americans who are
employed or actively looking for work – is “entirely due to
retirement.”
Fed policymakers, bound by law to achieve full employment
and price stability, may take note as they try to predict when
the amount of so-called slack in the labor market will diminish,
leading to inflationary wage pressures.
While San Francisco Fed President John Williams said in
September that the low employment-to-population ratio is sending
a much too pessimistic signal on the job market, Ben Bernanke,
who stepped down as Fed chairman on Friday, said in November the
ratio overstates the degree of slack in the labor market.
