Wednesday, January 13, 2010

Discouraged workers just isn't a new phenomenon 

Ed and Jim Geraghty have responded to yesterday's post on unemployment rates. I won't say anything about Ed's except that I agree with his and Crudele's point on Goolsbee (I find the latter's performance in the Administration more disappointing than any other economist's.) Geraghty makes the point:
Even when the economy starts creating jobs in bunches, you�re going to see the unemployment rate stay steady or perhaps even increase as these folks who dropped out of the labor force jump back in. The size of the U.S. civilian labor force in the third quarter of 2009 was 154,235,000; in the December figures it is 153,059,000. That�s 1,176,000 people who stopped counting towards the unemployment figure. Right now, the Obama administration's economic management is getting graded on a curve, because hundreds of thousands of frustrated out-of-work citizens are treated as nonentities under our usual statistics.
Well yes, but that's always been true, though this recession has been particularly harsh. Let's look at the last three recessions' data for the labor force participation rate, which is equal to the total people employed plus those (officially) unemployed divided by the population over age 16.

Geraghty certain has a point, that this time it's more than before, but we saw a drop in that rate from 66.8% to 66% around the 1990-91 recession and 67.2% to 66.5% in the 2001 case. This recession has twice the drop, which returns us to participation rates of the early 1980s (more on this in the next paragraph.) Like the others, that persists for awhile after the end of the recession. If you want to argue about the magnitude -- why is it so much more this time? -- you could point to extending unemployment benefits or that specialization makes job search longer. This doesn't obviate Geraghty's point that the official unemployment rate is masking some other people suffering the effects of recession, but that was Commissioner Shiskin's point in the literature I first reviewed.

But another question I would ask: do we really know that in the current economy, with its current demographics and with all the new labor-enhancing technologies created, that 66 or 67% labor force participation rates are the right ones, those we would find in full employment equilibrium? What is it that made 64% or 65% full employment in 1980s but not now? Please don't expect me to have an answer to that question right now, because I don't, but I am wondering if "the new normal" means a lower LFPR.