NY Fed Says Job Market Is Great, Really

New research claims that an import labor market indicator is “misleading.” But it fails to answer the most important questions.

There's a saying that demographers can explain 150 percent of whatever you want to know. In that context, it probably makes sense to read a new piece of research from the Federal Reserve Bank of New York with extra skepticism. The claim is that the labor market is stronger than most people think.

Most of the time, the best way to gauge the health of the labor market is to ask lots of people whether they want to work and compare that to the number of people who are working. This is more or less how the unemployment rate is calculated. This methodology has recently come into question because many people stopped looking for work right about the time the economy tanked and have kept dropping out of the labor force throughout the gradual economic recovery. The implication is that the recent improvement in the unemployment rate may be overstating the extent to which the job market has healed.

In an effort to get around this problem, analysts have used other measures such as the ratio of workers to the total population of working-age adults. There has been no improvement in this measure since the trough reached early in the crisis.

The New York Fed researchers start off by noting that the aggregate number of working adults is "misleading" without accounting for the tremendous recent increase in the share of the U.S. population aged 65 and older. From there they construct models to estimate the chance that a person of a given age, education, race and gender is working. Using that information, they then construct a demographically adjusted measure of the employment-population ratio, which looks like this. When counted "properly," the U.S. economy is less than a percentage point away from full employment.

Unfortunately, the explanation ignores the actual data we have on employment by age group. For their narrative to make sense, you would expect to see sharp declines in the employment-population ratio across all ages and then see sharp recoveries across all ages. The changing mix of age groups should, if you believe the New York Fed, be sufficient to explain why the total employment-population ratio has changed so little. Yet the reality is a bit different. Just compare the employment-population ratio for Americans aged 55 and older against the ratio for Americans aged 35 to 44 and 45 to 54.

Americans 55 and older didn't lose their jobs during the recession to the extent that younger ones did. In fact, the proportion of older Americans with a job is higher now than in 2006, partly because it is harder to retire than in the past when asset prices were high and rising. Meanwhile, Americans in their late 30s and early 40s have only closed about one-third of the gap between the pre-crisis peak and the crisis trough. Moreover, their progress seems to have stopped sometime in the beginning of 2012. Americans aged 45 to 54 are even worse off -- they have had no gains at all since the trough of the recession. Aging obviously can't explain any of these findings.

I hope the New York Fed revisits its theories to explain these data.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)

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