Morning Must-Read: Cardiff Garcia: Slacking to Stand Still

Cardiff Garcia: Slacking to Stand Still: “A paper released last week by [Stephanie Aaronson et al.]… concludes that most of the decline in the labour force participation rate since the recession has been structural…. ‘Our cohort-based model suggests that cyclical weakness was depressing the participation rate by about ¼ percentage point in 2014:Q2’…

As I said before, this smells to me like overfitting: I want a reconciliation with Moffitt et al. (2012) and also a much better reconciliation with the behavior of the prime-aged participation rate as well:

To quote Aaronson et al. (2006):

Increases in the participation rate of adult women likely stem from numerous structural factors…. It seems likely that new generations internalized many of these changes more easily than did mature cohorts, who had already made “sticky” choices…. Much of the change in the aggregate female participation rate appears to have resulted from progressively higher average participation rates of successive cohorts….. The participation rate for men in their prime working years… held steady during the strong labor market of the mid- to late-1990s. After turning down again during the 2001 recession, it has been fairly flat since 2002.

That is not the lead-in that would lead us to expect a conclusion that the 2.5%-point decline in prime-age participation since 2007 is “structural”…

Cardiff goes on:

The wider issue is that trends thought to be structural aren’t necessarily irreversible…. The dovish argument, to which we still subscribe, is that the only way to know is for the Fed to aggressively pursue [expansion until]… the labour market becomes so tight that employers feel they have no choice but to make work more attractive…. Year-on-year headline PCE inflation is 1.6 per cent through July, the last available reading–which also happens to be its average rate since the recession. That’s not only an extended period of undershooting 2 per cent, but also a staggering demand fail given what happened to labour markets in that period…. To further make incoming data, rather than time, the clear contingency on which to base monetary policy would be perfectly sensible…