US Economy Facing Massive Structural Change in Five Charts
The reaction in the popular financial press to last week's Employment Report for October was one of surprise. The unemployment rate dropped to 5.0% and the number of new nonfarm jobs (a relatively volatile number subject to extensive revisions) jumped to 271K. The popular consensus was that the surprising number of new jobs was an outlier and that new jobs will continue to improve, but not at the rate for October. If this growth does continue, many expect the Fed to raise rates come December.
Our preference is to look that the data from a longer-term perspective and to give special attention to the data for the core workforce, ages 25-54. We continue to see evidence of major structural changes in the US workforce.
Here is an updated series of charts illustrating some changes that are far more significant than the cyclical impact of the 18-month Great Recession, which the NBER identified as beginning in December 2007.
The Unemployment Rate: Additional Jobs Needed to Match Lows
The closely watched headline unemployment rate is a calculation of the percentage of the Civilian Labor Force, age 16 and older, currently unemployed. Let's put that into its historical context. The first chart below illustrates this monthly data point since 1990.
The indicator for October dropped from 5.1% to 5.0%. Today's Civilian Employed would require 1.0 million additional job holders to match its interim low in 2007, and we would need 1.9 million to match the lowest rate in 2000. This is unchanged from the previous month.
Additional Jobs Needed for the Prime Employment Age Group
Let's look at the same statistic for the core workforce, ages 25-54. This cohort leaves out the employment volatility of the high-school and college years, the lower employment of the retirement years and also the age 55-64 decade when many in the workforce begin transitioning to retirement (e.g., two income households that evolve into one-income households).
In the latest data this indicator has jumped back up from 4.2% to 4.4%. The cohort population was little changed, up 3 thousand, and the number of employed dropped 35 thousand last month. The labor force headcount of this prime cohort increased by 182 thousand.
Today's age 25-54 labor force would require the additional employment of 1.0 million age 25-54 to match its interim low in 2006 and 1.5 million to match the lowest rate in 2000. This is worse than the previous month's 0.8M and 1.3M, respectively.
Labor Force Participation Rate: A More Sobering Measure
A wildcard in the two snapshots above is the volatility of the Civilian Labor Force—most notably the subset of people who move in and out of the workforce for various reasons, not least of which is discouragement during business cycle downturns. The chart below continues to focus on our 25-54 core cohort with a broader measure: The Labor Force Participation Rate (LFPR). The LFPR is calculated as the Civilian Labor Force divided by the Civilian Noninstitutional Population (i.e., not in the military or institutionalized). Because of the extreme volatility of the metric, our focus is the 12-month moving average.
Based on the moving average, today's age 25-54 cohort would require 2.9 million additional people in the labor force to match its interim peak participation rate in 2008 and 4.2 million to match the peak rate around the turn of the century. This is unchanged from the previous month.
Why are so many more labor force participants needed for a complete LFPR recovery? When the economy is moving at full speed, as in the late 1990s, jobs are abundant, which encourages the population on the workforce sidelines to join the ranks of the employed. Today's economy doesn't offer that sort of encouragement.
Employment-to-Population Ratio: Off Its Post-Recession Low
The next chart below is calculated as the Civilian Employed divided by the Civilian Noninstitutional Population. Again our focus is the 12-month moving average. A significant feature of the Employment-to-Population Ratio is that it isn't affected by the volatility of labor force participants who, for various reasons, are unemployed.
First the good news: This metric began to rebound from its post-recession trough in late 2012. However, the more disturbing news is that the current age 25-54 cohort would require an increase of 3.6 million employed prime-age participants to match its ratio peak in 2007. To match its mid-2000 peak would require a 5.5 million participant increase. This is unchanged from the previous month.
A Structural Change in the US Economy
The charts above offer strong evidence that our economy is in the midst of a massive structural change. The three mainstream employment statistics — unemployment, labor force participation and employment-to-population — all document an ongoing economic weakness far deeper than the result of a business cycle downturn.
In order to discount the general belief that the aging of the baby boom generation is a major factor in weak employment, we've focused on the 25-54 age group. Also, by excluding the age 55-64 decade associated with early or pre-retirement, we've eliminated a cohort that might include a major source of discouraged or less-determined workers.
The Growth of the Elderly Workforce and Its Causes
Let's close this analysis with a chart that essentially demolishes the prevailing view of our aging population as a demographic drag on labor supply. Here is the ratio of the 65-and-over cohort as a percent of the employed civilian population all the way back to 1948, the earliest year of government employment data. Mind you ... these people are not only in the workforce, but also actually employed.
The 12-month moving average of elderly employment is at its historic high of 5.6% -- now over double its low in the mid-1980s. This is a trend with multiple root causes, most notably longer lifespans, the decline in private sector pensions and frequent cases of insufficient financial planning. Another major factor is the often surprising discovery by many of the elderly that, financial consideration aside, the "golden years of retirement" are less personally satisfying than productive employment. Note that the growth acceleration began in the late 1990s, prior to the last two business cycle downturns (aka "recessions").
We are clearly experiencing a structural change in employment, one that continues to have a major impact on the overall economy. The fact this change was exacerbated by a business cycle downturn in late 2007 should not blind us to its structural nature.
Note: For some related analysis, see the following periodic updates:
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