Academic journal article Economic Review (Kansas City, MO)

The Trend Growth Rate of Employment: Past, Present, and Future

Academic journal article Economic Review (Kansas City, MO)

The Trend Growth Rate of Employment: Past, Present, and Future

Article excerpt

Over the course of the recovery from the 2001 recession, many forecasters have revised downward their expectations for job growth in the United States. The often disappointing pace of employment growth has been attributed to various forces, such as the high health-care costs faced by employers, structural changes causing some industries to decline, outsourcing of jobs from the United States to other countries, and strong productivity growth. (1) Many of these explanations imply the sluggish pace of job gains to be the result of weakness in aggregate demand and labor demand. However, some observers have suggested that broad demographic changes affecting labor supply--such as the aging of the population--could account for part of the sluggishness of job growth.

The labor supply explanation of disappointing job growth implies that forecasters' usual rule of thumb for benchmark, or trend, job growth may now be too optimistic. The benchmark is an estimate of the number of jobs the economy must add per month to absorb typical increases in labor supply due to population growth and trend changes in labor force participation. Thus, the benchmark corresponds to an estimate of trend or sustainable employment growth. Common rule-of-thumb estimates put the trend rate of increase at 150,000 jobs per month. But if demographic changes have slowed the growth of labor supply, the trend rate of job growth may have fallen below the historical benchmark.

A change in trend would have important implications for fiscal and monetary policy. For fiscal policy, slower trend growth in employment will tend to result in slower long-term growth in tax revenues, with potentially important effects on government programs such as Social Security. For monetary policy, assessments of the state of labor markets and the overall economy compared to sustainable trends often figure prominently in monetary policy decisions. If trend job growth were to slow, actual growth in jobs that appears weak by historical standards could exceed the new trend rate. The course of monetary policy could differ substantially if job growth were correctly realized to be above trend rather than incorrectly assessed to be at or below trend. Therefore, accurate assessments of potentially changing trends are important to effective monetary policy.

This article examines employment and labor force indicators for evidence of a slowing of trend employment growth in the United States. The first section of the article analyzes historical movements in employment, population, and labor force participation for evidence of changes in trend growth rates. The second section combines information from available forecasts of population, labor force participation, and other indicators to project the trend rate of employment growth over the next ten years. The article concludes that declines in the growth rates of population and labor force participation have caused the trend growth rate of employment to slow. Over the next ten years, a reasonable baseline projection for trend job growth is 1.1 percent per year, or about 120,000 jobs per month.

I. HISTORICAL EVIDENCE OF CHANGES IN TREND GROWTH

To assess demographics-related changes in employment trends, economists often rely on an identity relating employment to population, the labor force participation rate, and the unemployment rate. (2) The identity allows changes in employment growth to be decomposed into contributions from growth in population, labor force participation, and unemployment. Long-term demographic shifts can lead to significant changes in the trend growth rates of each of these three variables and, in turn, employment. Such demographic shifts primarily affect employment through their impact on labor supply. However, long-term changes in demand-side factors could also affect the trend growth rate of employment through, for example, labor force participation and unemployment rates.

Over the course of this article, trends will be measured in various ways, all intended to reflect the same concept. …

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