Saturday, May 05, 2012

Falling U.S. Participation Is Partly Demographic

Yesterday's U.S. employment numbers were even weaker than the headline payroll employment and unemployment rates suggested. The household survey showed an actual drop in employment, lowering the employment to population ratio to a level no higher than a year earlier. The payroll survey meanwhile also showed that nominal wages were flat, implying most likely a drop in real wages.

However, it seems that the change in employment in recent years hasn't been quite as weak as the employment to population ratio suggests. I have previously disputed that, but now I have partly changed my mind because I now realize that I misunderstood how the employment to population ratio is calculated.

I believed it related the number of employed 16- to 64-year olds to the total population of 16- to 64 year olds. However, it turns out that it relates the total number of employed persons older than 16 to the total population older than 16, which is to say it includes everyone who is 65 or older. Because people older than 65 typically have a lot lower employment rate than 16- to 64 year olds this means that demographic shifts that increases the share of the population older than 65 will lower the employment rate even if the job market really doesn't weaken.

The point of using the employment to population ratio instead of the official unemployment rate is to detect the degree of "hidden" unemployment, but if changes in it reflects demographic changes then it too can be misleading. And as the number of people older than 65 is increasing it follows that the decline in the employment rate is exaggerated.

However, while part of the decline reflects that the population is getting older, most of it reflects an increase in unemployment, both official and "hidden" as was shown here.