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The Labor Force Participation Farce

I try to avoid partisanship on this site, but it seems no matter how well the economy is doing, or how many positive dynamics are in place (there being no such thing as a perfect economy,) the boo birds trot out the old chestnut about the Labor Force Participation Rate.

Unfortunately, it's not terribly relevant, and if you go back in time on this site, I've debunked this at least three times before. But it keeps popping up, especially when there is a Democratic President.

Let's start with the obvious: Labor Force Participation and the Unemployment Rate are not correlated.

The data is lifted from economist Roger E.A. Farmer's blog where he writes: "Try as I may, I cannot get excited about the changes in the labor force participation rates. They display secular trends that are largely explained by the aging population and by the sociology of an increase in female labor participation in the 1950s and 1960s."

Let's look at it another way:

The Participation Rate (yellow line) merely reflects a massive demographic trend that can trace its beginning to September 1, 1939 when Hitler invaded Poland, the world was put on hold for awhile, and a baby boom manifested itself decades later. Even during the "horrible" 1970s, LFPR is on a tear.

The U-3 rate (green line) goes through its ups and downs, but the Participation Rate wafts calmly through it all, until the year 2001, when something truly cataclysmic happens: The LFPR for the age 16-19 cohort rolls off the table and the aggregated Participation Rate figure becomes massively skewed.

That 10 percentage point swoon from 2001 to the 2008 crash was used as a cudgel by every talk radio and cable news host to blast the results of the economic recovery even as the unemployment rate plummeted, and even though it fell before the crisis hit. But if that younger cohort is eliminated, and the age 25-54 segment is isolated and viewed separately, LFPR has only sunk by 2/10ths of a percentage point, marked from the end of the 2001 recession to February 2008, on the doorstep of the Great Financial Crisis.

Why look at it that way? It at least removes some of the demographic tail wagging each end of the age spectrum induces into the total figure.

And today? We're starting to see a small resurgence in the 16-19 cohort, even as the older one ages out of the workforce. But nevertheless, LFPR shouldn't be used as a gauge of employment strength, and if you have to choose a measurement of this kind, go by the Prime Age Employment to Population Ratio instead. Despite the noise inherent in both metrics, "EPOP," especially if it's sliced and diced by age cohort, is the more telling. Nevertheless, as Farmer pointed out in the piece linked below, "It's the unemployment rate, stupid."



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