draws some useful comparisons between Canada, 1990-1999, and the U.S., post-2008. As he points out, Canada experienced a decade-long slump in the 90s which featured a depressed participation rate and employment/population ratio. It's useful, I think, to show how this experience was different from what we're seeing now in the U.S.
First, suppose we look at the paths of the unemployment rate in Canada, 1990-1999, and the U.S. from the beginning of 2008 to the present:
So, for the Canadian slump, the unemployment rate took about 40 months to reach its peak, vs. 20 months in the U.S., but from the peak in unemployment, it's about 80 months until the slump is over (i.e. unemployment is back to its pre-slump level) in both cases.
Next, let's look at the unemployment rate and the participation rate in Canada, 1990-1999 (deviations from the mean in the sample, to highlight what is going on):
Note that the participation rate bottoms out and begins increasing about 3 years after the unemployment rate reaches its peak.
Now the U.S., post-2008,
In this case, the unemployment rate peaks in October 2009, but three years later the participation rate was still falling. Indeed, we can't say for sure whether it has stopped falling, even though the slump is over. There's a recent upturn in the participation rate, but the time series is noisy, so it's not clear whether this will be sustained.
So, if you think the 1990-1999 period in Canada tells us that the labor force participation rate in the U.S. is on the way up, you should be more skeptical. But labor force behavior in other countries, including Canada, is illuminating concerning what is going on in the U.S. right now. Canada has had similiar real GDP growth to the U.S. since the last recession, and has similar demographics, but its participation rate did not fall like the U.S. participation rate did recently, as David shows. So what's causing the U.S. participation rate to fall? I don't think it's anything to do with wages. Here's the times series, since 2007, of average labor productivity and real wages.
You can measure both in some different ways. What I've done here is to take hours of payroll employment divided by real GDP as my average labor productivity measure, and the average hourly earnings of private non-farm payroll employees, divided by the pce deflator, as my real wage measure. You can see that average growth in productivity and the real wage have been about the same since early 2007. So nothing funny going on there, apparently.
Another interesting feature of the data is what is going on with the long-term unemployed. Here's the number unemployed 27 weeks and more as a percentage of the labor force:
That's still high relative to recent history, and represents a little less than one third of total unemployment. So, we currently have an unusually low number of short-term unemployed and an unusually large number of long-term unemployed in the U.S. And the long-term unemployment rate appears to have leveled off and is not budging. So, if if the long-term unemployed are not finding work, it's hard to see how discouraged workers who left the labor force are going to have an easier time of it. My best guess is that what is going on is related to mismatch (between the demand for skills and the skills people want to supply), and it will take higher productivity growth (and thus higher real wage growth) to induce a sustained increase in labor force participation.
Hi, in your discussion of your first graph you refer to the time period as "quarters", as in "about 80 quarters until the slump is over". Months are the time period on the graph though. To me 80 quarters sounds like twenty years.ReplyDelete
oops. It's months. The chart is labelled correctly.Delete
Is saying that higher real wage growth, which could happen through higher productivity growth, would incentivize more people to join the labor force an accurate alternative way for me to understand your conclusion? Or is there something about the higher productivity growth that in and of itself causes people to be more willing to work even if their wages didn't really increase? I'm imagining a person who might be willing to work if they felt their skills were being used most effectively as possible but not willing to work knowing they weren't being used that way? I imagine that would be a difficult thing to measure.ReplyDelete
That's just demand and supply. Higher productivity raises the demand for labor, wages go up, and quantity supplied rises - i.e. people move from out of the labor force to employment.Delete
"I'm imagining a person who might be willing to work if they felt their skills were being used most effectively as possible but not willing to work knowing they weren't being used that way?"
Sounds like a person whose wage would be high in a job that fit their skills well, but the jobs available for this person don't match their skills well, and thus pay low wages. So that person might prefer to stay out of the labor force.
"I imagine that would be a difficult thing to measure."
Possibly, but these are the sorts of problems that labor economists deal with all the time.
Thank you. I hadn't considered that increased productivity might lead to increased demand for labor.Delete
Hi Dr Williamson, please explain how both these charts can both be true at the same time and if there are any red flags that can be understood from them taken together. Thanks for your time: https://research.stlouisfed.org/fred2/series/HDTGPDUSQ163N https://research.stlouisfed.org/fred2/graph/?g=3xG8ReplyDelete
First, it helps to express the second one as a percentage of GDP, to make the 2 comparable:Delete
Still, you're seeing an increase in C and I loans relative to GDP after the recession, and this quantity is fairly high, though not out of line with previous business cycle peaks. So, a couple of things going on. Household debt as a fraction of GDP has declined mainly because of a decline in mortgage debt - lending standards are much higher, and the amount of home equity lines of credit is down a lot. That's a good thing, as incentive problems in the mortgage market were the principal cause of the financial crisis. But you shouldn't necessarily worry about the growth in C and I loans as reflecting some kind of similar incentive problem. There's no reason to think that these loans are secured with weak collateral (as was the case pre-financial crisis in the mortgage market), and the growth in commercial bank lending could be offset by weakness in financing through other means, for example in the commercial paper market:
I didn't take that as a ratio to GDP, but you could do that adjustment.
Dr Williamson, Lee Adler says that C & I loans are soaring because they are being used for buybacks of stock. That seems like a useless sort of endeavor. But I could be wrong so I would like to know your opinion. Thanks.Delete
Also, El-Erian has said there are limits to monetary policy and that corporations need to unlock the vaults, and I would assume pay a lot better wages. He sees possible political upheaval if this isn't done. So, he is saying that ZIRP and the rest is simple putting off the day of reckoning. I would like your opinion on that as well.