Lunchtime Must-Read: Jared Bernstein: More on the Important New Blanchflower/Posen Paper

Jared Bernstein: More on the Important New Blanchflower/Posen Paper: “B&P’s finding that including labor force inactivity in their wage analysis…

…helps explain some of the variation (in a particularly important way I’ll show below) has a very important implication. If the depressed labor force is a statistically identifiable contributor to slack, then some of the current labor force inactivity can be reversed, much the same way unemployment comes down in the face of strengthening labor demand. Or, put differently, part of the decline in the labor force is just slack that’s not measured by the unemployment rate…. Yellen… [says] as much: ‘…some “retirements” are not voluntary, and some of these workers may rejoin the labor force in a stronger economy… a significant amount of the decline in participation during the recovery is due to slack…’. P&B add their view that ‘…many individuals who are not actively searching for work under current labor slack conditions remain attached to the labor market.’  All of which leads to their key punchline: ‘A substantial portion of those American workers who became inactive should not be treated as gone forever, but should be expected to spring back into the labor market if demand rises to create jobs.’ Obviously, that has important implications for both the living standards of working-age households and macroeconomic growth…