Say goodbye to the “discouraged workers”

For the past few years I’ve been suggesting that the labor force participation rate is not going to bounce back.  Commenters have insisted that the workers were just “discouraged”, and that they’d come back in and start looking for jobs when the labor market got somewhat better.

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Today the unemployment rate fell to 5.1%.  If that’s not the natural rate, it’s pretty close. Close enough so that if you really wanted a job you should at least be looking by now.  And yet the Labor force participation rate is 62.6%, the lowest level since the 1970s. No, I’m afraid the discouraged workers are gone for good.  Indeed the Fed wants to tighten now to prevent the job market from overheating!

I watched CNBC this morning during the jobs report, and the commentary was pretty funny.  They didn’t seem to think a quarter point was a big deal, and suggested that it might mean about 10% off the Dow.  But 10% corrections happen quite often, so it’s no big deal!  They were genuinely puzzled by why the stock market thought it was a big deal.  “Just a quarter point.”  One Tea Party type bragged that he’s been for a rate hike for 4 years.  I’ve noticed recently that people don’t seem at all embarrassed when their previous policy recommendations turn out to be totally wrong in retrospect.  Even worse, they don’t seem aware of the fact that they were wrong.  Monetary policy commentary is just free floating atavistic urges, completely untethered from any sort of model of policymaking, or economic data.

Over at Bloomberg there’s a new editorial today calling for the ECB to abandon its 2% inflation target and replace it with . . . with . . . with . . . I get to the end of the article and there’s just nothing.  Just get rid of the 2% inflation target.  That’s all. It would be like the captain instructing the pilot “don’t steer east by northeast.”

PS.  In my previous post I erroneously stated that the Neo-Fisherians believe in short run monetary superneutrality.  David Andolfatto pointed out that this claim is not correct.  Mea culpa.  Fortunately it did not affect any of the substantive points I was trying to make.  (I think what confused me is that short run superneutrality will also get you to Neo-Fisherism.  But it’s not a necessary condition, as I should have realized.)


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34 Responses to “Say goodbye to the “discouraged workers””

  1. Gravatar of Michael Byrnes Michael Byrnes
    4. September 2015 at 07:01

    Belongia and Ireland:

    http://www.economics21.org/commentary/confusion-contradiction-federal-reserve-somc-09-03-2015

  2. Gravatar of Jesse Jesse
    4. September 2015 at 07:53

    Why?

    I would believe that discouraged workers were permanently out of the system if someone could explain why so many prime age workers are out of the labor force. Has the nature of the US economy changed that much in 8 years? Have the demographics changed that much? Also, why is ~5% the natural rate? Couldn’t the natural rate be much lower?

    It doesn’t make sense to me.

  3. Gravatar of Jason Jason
    4. September 2015 at 08:06

    http://www.vox.com/2015/9/3/9251775/chinas-economic-slowdown

    Matt Yglesias tells it like it is on China.

    It’s amazing, Scott, you continue to have faith in a country run by brutal thugs, and what’s worse, thugs who recently seem to be slipping in their competence

  4. Gravatar of James in London James in London
    4. September 2015 at 08:17

    Stupid question. But what is the relevance of the natural rate of unemployment for a monetary policy based on NGDPLT?

  5. Gravatar of benjamin cole benjamin cole
    4. September 2015 at 08:20

    Monetary policy as free-floating atavistic urges?
    Maybe.
    There is also an hysterical prissiness about inflation that passes for monetary policy.
    Then, there is starting from the premise that 0% inflation is nirvana (forget how to measure it) performing incredible intellectual gymnastics and theoretical contortions to prove the point.

    Gadzooks dudes, print more money.

    I may disagree with Scott Sumner. I think there is a slice of the population that will reappear in the labor force when labor conditions tighten. We might need to reform the Social Security and VA disability programs.

  6. Gravatar of E. Harding E. Harding
    4. September 2015 at 08:21

    Jason, that’s palbum. How are you going to get consumption led-growth without investment to power it beforehand? The idea giving transfers from the productive to the unproductive is going to put the Chinese economy on a more sustainable footing is like imagining a snake eating itself will just build and build body mass. It won’t. So far, there’s just no evidence the Chinese economy is in “a lot of trouble”.

  7. Gravatar of E. Harding E. Harding
    4. September 2015 at 08:22

    BTW, Taiwan, Chile, South Korea, and Greece were run by brutal thugs, too. Didn’t hurt their economies in the long run.

  8. Gravatar of ssumner ssumner
    4. September 2015 at 08:24

    Thanks Michael, I’ll do a post.

    Jesse. No the natural rate cannot be much lower. It might be a bit lower but I don’t think there’s any chance it’s much lower. I’m not sure where the prime age males have gone. Some are in early retirement, some in the underground economy, and some on disability. Beyond that I’m not sure. Why doesn’t someone ask them why they aren’t looking for work?

    Jason, Don’t you realize that I’m a China bear? My growth forecast for China is below the consensus of economists. You are so blinded by hatred of China that you don’t even seem to be able to think straight. Don’t criticize me, criticize the consensus that forecasts 6.7% growth in 2016, which I view as overoptimistic.

    And I have no faith in China’s leaders, as you’d learn if you bothered to read my posts without your ideological blinders on.

    Tell me Jason, are you one of those who have predicted a China crash in each of the past 35 years, and then when it didn’t happen cried the data was fixed?

  9. Gravatar of ssumner ssumner
    4. September 2015 at 08:26

    James, That’s one of the nice things about NGDPLT—the natural rate of unemployment has no relevance.

    Ben, When the unemployment rate drops from 10% to 5.1%, then labor markets have tightened.

  10. Gravatar of Dan W. Dan W.
    4. September 2015 at 08:30

    Jesse, I wonder too what is “normal” about the supply of labor. Has it ever been “normal”? By what definition? It seems to me that the supply of labor is driven by a lot of factors which include ever changing cultural preferences and demographics.

  11. Gravatar of Jesse Jesse
    4. September 2015 at 08:41

    I got a little carried away with “much lower”. I was thinking along the lines of 4.6-4.7. Still, it seems to me that if you believe that the dynamic of the participation rate has changed, there is no reason to believe that the natural rate of unemployment has not also changed.

  12. Gravatar of collin collin
    4. September 2015 at 08:41

    Holy Crap, I think Jack Welch was right about Obama. What he missed was the ‘Chicago Boys’ comment, and instead I think Obama must have hired some Chinese style economist to do the jobs. Outside a couple outliers, the headline reads “~200K net new jobs for last month and a slight drop in Unemployment Rate” since 2011ish. The consistency is almost the same as Chinese GDP growth rates of ~7% and unemployment rate of 4.1%.

    However you were right about the long term of the labor participation rate. I wonder what the drivers are: Young people focusing more on High School & Secondary education, More middle class families returing to single income earners with housewife/husband, increased homeschooling or just more early retirements?

  13. Gravatar of dbeach dbeach
    4. September 2015 at 08:57

    Somewhat related to James’s question, I have what is perhaps a noobish question about your remark “the Fed wants to tighten now to prevent the job market from overheating!” Is this actually a thing that can happen? I get that at some point wages would rise, so that would (all else equal) hurt capital relative to labor, but the belief seems to be that it would be inflationary. Yet I don’t see what the mechanism is for that. Do higher wages somehow increase velocity or something?

  14. Gravatar of dbeach dbeach
    4. September 2015 at 09:04

    Oh, and regarding discouraged workers, I don’t know for sure whether they’re coming back, but U-6 unemployment still stands at 10.3%, down a great deal from its post-crisis high of 17.1% but still well above the pre-recession level of 8.0% and even farther above the tech-bubble low of 6.8%. So to me, even though the headline number is at a “full employment” level, the labor market still has some slack in it.

  15. Gravatar of ssumner ssumner
    4. September 2015 at 09:25

    Dan, Based on that comment I think it’s safe to say you don’t know what the “natural rate of unemployment” even means.

    Jesse, Sure it might be 4.6% or 4.7%, but in that case I’m right because if so we’ll be there soon, and obviously millions of discouraged workers aren’t going to suddenly poor back in at 4.7%, who weren’t already looking for jobs at 5.1%.

    dbeach, The U-6 is mostly picking up part timers, who are part of the 62.6%. So even if they get full time jobs, the LFPR stays low.

    The wage question is complicated. I’d argue that wage inflation is a better measure of the sort of “inflation” that central banks should care about than price inflation. But we are still too low on wages to get 2% PCE inflation. So wages are not a reason to tighten right now. If annual wage growth rose to the 2.5% to 3.0% range, then you think about raising rates.

  16. Gravatar of Randomize Randomize
    4. September 2015 at 09:28

    My guess is that a large portion of discouraged workers are receiving disability payments. With their old job at the mill not coming back, it’s easy to imagine that they’d rather surf disability than take some crummy job for half their previous pay. It’s a belief based entirely on anecdotal evidence but, if true, it means the participation rate won’t improve until these people age out of the workforce.

  17. Gravatar of Kevin Erdmann Kevin Erdmann
    4. September 2015 at 10:01

    The only group with labor force paticipation that seemed to have dipped permanently below it’s long term trend is men in their 20s. I’m not sure what that means – maybe just more housed ads because of gender equality, maybe it’s discouraged unskilled males….because of gender equality. But it does speak against most proposed reasons for low lfp. One thing that confuses the matter in such a long period of correction is that, except for the one-time jump in female lfp that topped out in the 1990s, all age and gender groups have a long term downward trend of about 1% per decade. For men this goes back to the beginning of the modern data series.

  18. Gravatar of Kevin Erdmann Kevin Erdmann
    4. September 2015 at 10:02

    “House dads”

  19. Gravatar of Justin Justin
    4. September 2015 at 10:10

    ” Monetary policy commentary is just free floating atavistic urges, completely untethered from any sort of model of policymaking, or economic data.”

    Most people, including professional macroeconomist talking heads, seem to think interest rates are like a thermostat in a house (in place without cold winters). You adjust it to offset the weather outside, but ultimately, you can’t too too much harm. Crank rates too high, things become uncomfortable, but the consequences are ultimately limited. They never ask themselves why inflation is 2-5% historically, instead of -50% or +5000%

  20. Gravatar of Dan W. Dan W.
    4. September 2015 at 10:11

    Scott,

    The FRED page cautions: “Note that the natural rate is calculated, not measured, and thus is subject to the assumptions made.”

    https://fredblog.stlouisfed.org/2014/10/whats-the-normal-unemployment-rate/

  21. Gravatar of Good-bye, so long, farewell? | Historinhas Good-bye, so long, farewell? | Historinhas
    4. September 2015 at 10:37

    […] a recent post Scott Sumner […]

  22. Gravatar of Jesse Jesse
    4. September 2015 at 10:38

    Kevin, where are you getting that data? I cannot find it broken out at BLS.

  23. Gravatar of foosion foosion
    4. September 2015 at 10:51

    I’d regard significant increases in compensation, or wages being a larger share of national income, as labor market tightening. The unemployment rate and labor force participation rate have too many confounding factors.

  24. Gravatar of Jesse Jesse
    4. September 2015 at 10:53

    Nevermind. I googled it.

  25. Gravatar of Ray Lopez Ray Lopez
    4. September 2015 at 11:43

    Sumner: “I’ve noticed recently that people don’t seem at all embarrassed when their previous policy recommendations turn out to be totally wrong in retrospect. Even worse, they don’t seem aware of the fact that they were wrong. Monetary policy commentary is just free floating atavistic urges, completely untethered from any sort of model of policymaking, or economic data.”

    Projection noted. And why ‘recently’? You’ve been doing this for years. As have I. I bought gold in 2008 thinking we’d have inflation by now, but that was back when I believed the monetarist nonsense. Further research made it clear that money is, for all practical purposes, neutral or even super-neutral.

  26. Gravatar of Kevin Erdmann Kevin Erdmann
    4. September 2015 at 11:54

    Jesse, sometimes if I can’t find a detailed stat at the regular bls site, this site is useful:
    http://beta.bls.gov/dataQuery/find?removeAll=1

  27. Gravatar of James Alexander James Alexander
    4. September 2015 at 12:14

    Good grief. Did the real Scott Sumner write this?
    ” If annual wage growth rose to the 2.5% to 3.0% range, then you think about raising rates.”
    This level would really represent an economy growing so fast that you had to actively tighten monetary pouch to cool things down?

  28. Gravatar of ssumner ssumner
    4. September 2015 at 16:43

    Ray, Why am I not surprised you bought gold?

    James. I didn’t actually say tighten, I said raise rates. If wages accelerate to say 2.7%, then a quarter point higher interest rate than today would mean EASIER money than today.

  29. Gravatar of dtoh dtoh
    4. September 2015 at 18:08

    @scott

    Anecdotally, I’d say part of it has to do not just with wages but whether a job is interesting and satisfying. It used to be easier for people without good skills and relevant training to get interesting jobs. Now it takes a lot more work to get qualified for jobs. So if they can get by, I think many people are choosing to stay at home rather look for jobs they think won’t be fulfilling. Also if there are many people around you in the same boat, there is less social stigma associated with being unemployed. Same with living with your parents — when I got out of school, living with your parents was the ultimate humiliation. Now a lot of people seem fine with. It’s a lot easier to get by without a job if you’re not paying rent.

  30. Gravatar of E. Harding E. Harding
    4. September 2015 at 18:35

    @collin
    -No evidence of that:
    https://research.stlouisfed.org/fred2/series/CE16OV
    Do “percent change”.

  31. Gravatar of James Alexander James Alexander
    4. September 2015 at 22:16

    “If wages accelerate to say 2.7%, then a quarter point higher interest rate than today would mean EASIER money than today.”
    I get the distinction, but I still wonder if it would mean easier money. In itself a 25bps rise doesn’t look much but the signalling effect could well mean lower NGDP growth expectations. I’d argue that the current Taper Tantrum 2 is exactly over this issue.

  32. Gravatar of ssumner ssumner
    5. September 2015 at 06:03

    James, I certainly agree that the signaling effect is the key, and I should have said “may mean easier money than today.”

  33. Gravatar of Kevin Erdmann Kevin Erdmann
    5. September 2015 at 16:27

    Here’s a post I did a few months ago with disagreggated LFP data. I forgot how much the recent trend in LFP depends on the 55+ age group, which had LFP that was growing strongly, but has leveled off.

    http://idiosyncraticwhisk.blogspot.com/2015/05/revisiting-labor-force-participation.html

  34. Gravatar of ssumner ssumner
    6. September 2015 at 05:06

    Thanks Kevin, That’s an excellent post.

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