Academic journal article Brookings Papers on Economic Activity

The Reversal of the Employment-Population Ratio in the 2000s: Facts and Explanations

Academic journal article Brookings Papers on Economic Activity

The Reversal of the Employment-Population Ratio in the 2000s: Facts and Explanations

Article excerpt

ABSTRACT The decline in the employment-population ratios for men and women over 2000-07, just before the Great Recession, represents a historic turnaround in U.S. employment trends. The decline is disproportionately concentrated among the less educated and younger groups within the male and the female populations and, for women, especially among unmarried women without children. About half of the decline among men can be explained by declines in wage rates and by changes in nonlabor income and family structure, but the decline among women is more difficult to explain and requires distinguishing between married and unmarried women and between those with and without children, as these subgroups have experienced quite different wage and employment trends. Neither changes in taxes nor changes in government transfers appear likely to explain the employment declines, with the possible exception of the Supplemental Nutrition Assistance Program. Other influences such as the minimum wage and health factors do not appear to play a role, but increases in incarceration may have contributed to the decline among men.

There are many indicators of trends and cycles in the labor market. The unemployment rate is the primary indicator used in analyzing cyclical changes, but for long-term trends the employment-population ratio is the best indicator of the quantity of labor supplied. When one compares one cyclical peak with the next, thus holding the unemployment rate more or less fixed, the employment-population ratio necessarily reflects the labor force participation rate, which is the common measure of labor supply. Long-term trends in the employment-population ratio can therefore likewise be taken as reflecting trends in labor supply.

This study examines the decline in the employment-population ratio from 2000 to 2007, just before the Great Recession began. The ratio for the overall working-age population (that is, for both men and women aged 16-64) stood at 74.1 percent in 2000 and at 71.8 percent in 2007. The decline was greater among the younger and less educated of both sexes. This drop in the ratio represents a historic reversal from its upward trend over the previous 30 years and hence constitutes a major change in the U.S. labor market.

The employment-population ratio has been much discussed recently, both in the press and among researchers and policymakers, because it underwent a further, even sharper decline during the Great Recession, falling 9.0 percentage points to 65.8 percent at its low point in January 2010 (several months after the official trough), a tremendous decline by historical standards? It has recovered only slowly since then, to about 67 percent in 2011. Behind this trend is a decline in the labor force participation rate-a contribution to the decline in the unemployment rate but not a particularly welcome one.

The factors already at work in the decline in the employment-population ratio before the Great Recession may in part explain this slow recovery since. Indeed, James Stock and Mark Watson (2012) predict that, should the long-term downward trend in the ratio continue, future recessions are likely to be deeper and future recoveries slower. More immediately, if the long-term decline continues, the employment-population ratio may not return to its 2007 value even when the recovery is judged complete.

The reversal of the employment-population ratio in the 2000s has received little formal study. In a session at the American Economic Association meetings in January 2012, Henry Farber reported his finding that changes in the age-sex-education composition of the population could explain no more than a quarter of the decline, and Robert Shimer, noting the greater rate of decline among youth, speculated that rigid wages or intertemporal substitution between the pre- and post-2000 periods could be partly responsible.2 David Autor (2010) finds that changes in the ratio over 1979-2007 as well as over the subperiod after 2000 are positively correlated with changes in wages, suggesting a conventional labor supply explanation. …

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