Tag: Full Employment

I Am Heartened by the Improvement in the Prime-Age Employment Rate. Now Let Us Let It Continue Rather than Stopping It…

Posted on by Brad DeLong

Here in the United States, there were always three arrows to “hysteresis”—to the argument that the failure to adopt policies that properly fought the downturn of 2008-2009 in an aggressive manner to restore full employment rapidly did not just temporary but permanent damage to the economy’s productive potential. A long period of very slack demand:

  1. slowed experimentation with business models, organizations, and technologies and so reduced total factor productivity growth by a poorly known but perhaps very substantial amount.

  2. diminished investment and reduced our productive capital stock relative to a rapid-recovery counterfactual baseline by a well understood and large amount.

  3. caused workers to exit from the labor force with little hope of getting them back—too much time out of the workforce had destroyed their social networks they needed in order to effectively search for jobs.

(1) and (2) dealt mighty and powerful permanent blows to American economic growth. Barring some currently-unanticipated large positive shock, we are never getting back to our pre-2007 growth trend:

Real Gross Domestic Product FRED St Louis Fed

But there has, over the past couple of years, been good news about (3).

The prime-age employment-to-population ratio is no longer lower than it has been since the 1980s, before the full coming of the feminist economic revolution to the workplace.

Fears that we would never get any significant fraction of the 5%-points of the prime-age population that lost their jobs in 2008-2009 back into work—fears that were very live and very scary over 2010-2013—appear to have been wrong. The prime-age employment-to-population ratio has been climbing at a rate of 0.6%-points per year since the end of 2013. Labor-side hysteresis has thus turned out to be a much smaller deal than worst-case analyses feared back even as little as three and a half years ago.

Do note, moreover, that this increase in the prime-age employment-to-population ratio has been accomplished with no signs of any inflationary pressure whatsoever. The fact that it has been accomplished leads to harsh judgments on the Federal Reserve and the administration of 2010-2014, which were unwilling to pursue the much more stimulative policies within their control—more and faster quantitative easing,

Simon Wren-Lewis: Could austerity’s impact be persistent?

: “How Conservative macroeconomic policy may be making us persistently poorer… https://mainlymacro.blogspot.com/2017/06/could-austeritys-impact-be-persistent.html

…I was happy to sign a letter from mainly academic economists published in the Observer yesterday, supporting the overall direction of Labour’s macroeconomic policy. I would also have been happy to sign something from the Liberal Democrats, who… have the added advantage of being against Brexit, but no such letter exists…. We desperately need more public investment and more current spending to boost demand, which in turn will allow interest rates to come away from their lower bound…. Nominal interest at their lower bound represent a policy failure…. In the textbook macroeconomic models, this policy mistake can have a large but temporary cost in terms of lost output and lower living standards…. In these basic models a short term lack of demand does not have an impact on supply…. Gustav Horn and colleagues… find that the impact of recent fiscal shocks have been persistent rather than temporary, at least so far…. I do not have to argue that such permanent effects are certain to have occurred. The numbers are so large that all I need is to attach a non-negligible probability to this possibility. Once you do that it means we should avoid austerity at all costs. In 2010 austerity was justified by imagined bond market panics, but no one is suggesting that today. The only way to describe current Conservative policy is pre-Keynesian nonsense, and incredibly harmful nonsense at that. That was why I signed the letter…

Why Is the FOMC So Certain the U.S. Is “Essentially at Full Employment”?

Posted on by Brad DeLong
Employment Rate Aged 25 54 All Persons for the United States© FRED St Louis Fed

Suppose you had, back in 1992 or 2004 or indeed any other time since 1990 and before 2013, asked a question of Charlie Evans—or, indeed, any of the other non-Neanderthal participants in the Federal Reserve’s Federal Open Market Committee meetings. Suppose you had asked whether a 25-54 employment-to-population ratio in the United States of today’s 78.5% was anywhere near “full employment”. What would they have said?

They would have said “of course not!”

They would have observed that the post-baby boom decline in fertility, wage stagnation among male earners, and the coming of feminism had greatly increased the share of 25-54 year old women who wanted paying jobs outside the home.

They would have pointed out that upward pressure on core inflation at an 80% 25-54 employment-to-population ratio in 1990 was small, that upward pressure on core inflation at an 82.5% 25-54 employment-to-population ratio in 2000 was minimal, and that upward pressure on core inflation at an 80% 25-54 employment-to-population ratio in 2007 was minimal.

They would have pointed out that today’s 78.5% was between between the 78.1% 1992 recession trough and the 78.6% 2003 recession trough.

They would have concluded that, by the standards of the post-feminist revolution era, a labor market with a 25-54 employment-to-population ratio of 78.5% was a labor market as bad from a business cycle perspective as the labor market got during the Great Moderation.

So why is Charlie Evans now saying that today the United States has “essentially returned to full employment”? Why no qualifiers? Why no “if you look only at the unemployment rate, and put the shockingly-low labor force participation statistics to one side…? Why no “it may well be the case that the U.S. has essentially returned to full employment? Why this certainty on the part of even the non-Neanderthal members of the FOMC—in public, at least—that the unemployment rate is the sole guide?

And why the puzzlement at the failure of core inflation to rise to 2%? That is a puzzle only if you assume that you know with certainty that the unemployment rate is the right variable to put on the right hand side of the Phillips Curve. If you say that the right variable is equal to some combination with weight λ on prime-age employment-to-population and weight 1-λ on the unemployment rate, then there is no puzzle—there is simply information about what the current value of λ is:

Charles Evans: Lessons Learned and Challenges Ahead: “These policies… produced results. Unemployment began to fall… https://www.chicagofed.org/publications/speeches/2017/05-25-lessons-learned-and-challenges-ahead-bank-of-japan

…more quickly than anticipated in 2013…. We were able to scale back the QE3 purchases…. Today, we have essentially returned to full employment in the U.S.

Unfortunately, low inflation has been more stubborn, being slower to return to our objective. From 2009 to the present, core PCE inflation, which strips out the volatile food and energy components, has underrun 2% and often by substantial amounts. This is eight full years below target. This is a serious policy outcome miss…

Charlie says a lot of good things in his talk. His discussions of “outcome-based policies… symmetric inflation target[s]… [and] risk management” are wise. But wisdom can be usefully applied only if you know where you start from. And we start from a position in which we really do not know how close the U.S. economy is right now to “full employment”—how much headroom for catch-up growth and catch-up employment remains, and how powerful and useful more aggressive policies to stimulate spending would be right now.

In 25 years my students are likely to ask me why the FOMC was so certain the U.S. was “essentially at full employment” today. What will I tell them?

Must-read: Ben Zipperer: “U.S. Job Growth Slows in January, as the Nation Remains Years Away from Full Employment”

Posted on by Brad DeLong

Must-Read: Almost all of those believing that we are now near full employment here in the U.S. dismiss the low employment-to-population ratio by noting that the population is aging. They very rarely confront the collapse since the late 1990s of the prime-age employment-to-population ratio.

But when they do confront the collapse since the late 1990s of the prime-age employment-to-population ratio, what do they say? I have heard only:

  1. “Peak male”–that the rise of the robots will systematically disadvantaging male workers, and we are starting to see this already. The problem with this is that the decline in employment-to-population since 2000 is about equal for 25-54 year-old males and females.

  2. “It’s too late”–that our failure to induce a rapid recovery in 2009-11 broke the connection of many prime-age workers to the social networks that allowed them to navigate the labor market, and that taking steps to get them back into the labor market could only succeed if accompanied by unwelcome and unthinkable inflation.

  3. “Stop and smell the roses”–that people found out in the late 1990s that they really did not want to work that hard and that long anyway.

May I say I find all three of these profoundly unconvincing?

Ben Zipperer: U.S. Job Growth Slows in January, as the Nation Remains Years Away from Full Employmenth: “Estimates of full employment vary, but one natural point of comparison is the tight labor market of the late 1990s…

…For the entire 1998-2000 period, the employed share of the prime-age population (ages 25 through 54) was at least 81 percent, reaching 81.9 percent in April of 2000. In the most recent business cycle, the prime-age employment rate was above 80 percent during the final quarter of 2006 and first quarter of 2007. A full employment standard of 81 percent therefore lies somewhere in between the peaks of the last two business cycles. Some of the brightest news in today’s employment report is that the employed share of the prime-age population moved to 77.7 percent, up from 77.4 percent in December…. Last month’s increase in the prime-age employment rate is excellent progress. But as part of its mandate to promote full employment, the Fed should consider the projected progress of the labor market as it considers slowing the rate of employment growth.

Must-read: Jared Bernstein: “2015 Was Solid Year for Job Growth”

Posted on by Brad DeLong

Must-Read: Jared Bernstein: 2015 Was Solid Year for Job Growth: “Payrolls were up 292,000 in December and the unemployment rate held steady at a low rate of 5%…

…in another in a series of increasingly solid reports on conditions in the US labor market. Upward revisions for the prior two months added 50,000 jobs, leading to an average of 284,000 jobs per month in the last quarter of 2015. In another welcome show of strength, the labor force expanded in December, leading the participation rate to tick up slightly.

December’s data reveals that US employers added a net 2.7 million jobs in 2015 while the unemployment rate fell from 5.6% last December to 5% last month. While the level of payroll gains did not surpass 2014’s addition of 3.1 million, it was otherwise the strongest year of job growth since 1999.

Simply put, for all the turmoil out there in the rest of the world, the US labor market tightened up significantly in 2015…. We are not yet at full employment. But we’re headed there at a solid clip, and that pace accelerated in recent months…

Graph Employment Rate Aged 25 54 All Persons for the United States© FRED St Louis Fed

I must say, when I look at this graph I find it very hard to understand the thought of all the economists who confidently claim to know that the bulk of the decline in the employment-to-adult-population ratio since 2000 is demographic and sociological. 4/5 of the decline in the overall ratio since 2000 is present in the prime-age ratio. More than 5/8 of the decline in the overall ratio since 2007 is present in the prime-age ratio.

It thus looks very much to me like the effects of slack demand–both immediate, and knock-on effects via hysteresis. And what demand has done, demand can undo. Perhaps it cannot be done without breaching the 2%/year inflation target, but:

  • That 2%/year inflation target is supposed to be an average, not a ceiling.
  • Since 2008:1, inflation has averaged not 2%/year but 1.47%/year.
  • There is thus a cumulative inflation deficit of 4.22%-point-years available for catch-up. And
  • The 2%/year inflation target was extremely foolish to adopt–nobody sane in the mid- or late-1990s or in the early- or mid-2000s would have argued for adopting it had they foreseen 2007-9 and what has happened since.
Consumer Price Index for All Urban Consumers All Items FRED St Louis Fed

Must-Read: Ken Rogoff: The Fed’s Communication Breakdown

Posted on by Brad DeLong

Must-Read: I guess I must be a foaming polemicist then :-)…

Ken Rogoff: The Fed’s Communication Breakdown: “Personally, I would probably err on the side of waiting longer…

…and accept the very high risk that, when inflation does rise, it will do so briskly, requiring a steeper path of interest-rate hikes later. But if the Fed goes that route, it needs to say clearly that it is deliberately risking an inflation overshoot. The case for waiting is that we really have no idea of what the equilibrium real (inflation-adjusted) policy interest rate is right now, and as such, need a clear signal on price growth before moving.

But only a foaming polemicist would deny that there is also a case for hiking rates sooner, as long as the Fed doesn’t throw random noise into the market by continuing to send spectacularly mixed signals about its beliefs and objectives. After all, the US economy is at or near full employment, and domestic demand is growing solidly…

I look at this graph:

A kink in the Phillips curve Equitable Growth

And I think: One always disagrees with the very sharp Ken Rogoff at one’s grave analytical peril…

But: Inflation expectations anchored at 2%/year, wage growth at 0%/year real, the prime-age employment-population ratio far below historical norms–that does not smell like an economy “at or near full employment” to me. And so I cannot see a “very high risk that, when inflation does rise, it will do so briskly”, or agree that “only a foaming polemicist would deny that there is also a case for hiking rates” not “sooner” but “right now”…