New CBO analysis on jobs gap

[oldfart]

Posted by Bob Arnold on September 2, 2014
Although conditions in the labor market have improved notably in recent quarters, a significant amount of slack remains, in CBO’s estimation. As discussed in a blog post last week and in our updated budget and economic outlook, CBO anticipates that economic growth will pick up in the next few years. That faster growth will reduce the amount of slack in the economy. Similarly, in CBO’s judgment, ongoing gains in employment will largely eliminate the existing slack in the labor market during the next few years.

Broadly speaking, slack in the economy refers to underutilized productive resources, including business equipment and structures that are idle, houses that are unoccupied, and people who would like to work but are not working (or who are employed but would like to work longer hours). In CBO’s view, the current slack in the labor market consists of several elements, including the following:

• The labor force participation rate is well below what CBO estimates would be achieved if the demand for workers was currently stronger—that is, well below the potential participation rate that reflects the estimated effects both of demographics (such as the age distribution of the population) and of the number of people who have left the labor force permanently in response to the recession and slow recovery;
• The unemployment rate is above CBO’s estimate of the natural rate (that is, CBO’s estimate of the unemployment rate arising from all sources except fluctuations in aggregate demand);
• In combination, the shortfall in labor force participation and the elevated unemployment rate have resulted in substantially lower employment in 2014 than would otherwise be the case; and
• The share of part-time workers who would prefer full-time work is significantly higher than it was before the recession, and the rate of long-term unemployment is still about a percentage point above its average rate during the years before the recent recession.

One important signal that significant slack remains in the labor market is continued slow growth in hourly labor compensation. But measuring slack is quite difficult—especially given the unusual developments in the labor market since the recession ended—and the current amount of slack could be a good deal larger or smaller than CBO estimates.

Labor Force Participation Rate
The labor force participation rate fell from 65.9 percent in the fourth quarter of 2007, at the beginning of the recent recession, to 62.8 percent in the second quarter of 2014.

CBO estimates that about ¾ percentage point of the decline since late 2007 represents the extent to which actual participation is below potential participation because of the contemporaneous weakness in both employment prospects and in wages. That amount is only slightly less than the effect CBO estimates for the fourth quarter of 2013, when the estimated shortfall of the actual participation rate relative to the potential participation rate was at its largest.

According to CBO’s analysis, most of the decline in the rate of labor force participation since late 2007 is attributable to two other factors: First, long-term trends, especially the aging of the population, account for about 1½ percentage points of the decline. Second, unusual aspects of the slow recovery of the labor market that led workers to become discouraged and permanently drop out of the labor force account for about ¾ percentage point of the decline.

Slack in the Labor Market in 2014 - CBO

I have some problems with the methodology. The interesting idea here is that the jobs loss due to the economic downturn is split into two parts, one presumably temporary and the other permanent. Slicing and dicing their numbers slightly differently we get a fall in the labor force participation rate from fourth quarter 2007 to second quarter 2014 of 3.1%. Half of that is attributable to secular factors such as an aging population, and would presumably occurred in any event. That leaves 1.6% as the decline attributed to the downturn.

The blog post did not give statistics, but I assume the figures were more gruesome toward the bottom. The allocation of the remaining decline is about half (0.75%) as a recoverable loss as the labor market picks up, and half (0.75%) as a permanent loss which will never be recovered.

This is a pretty big number. It also is making the point many have suggested that every month of slow recovery causes a permanent loss to the growth potential of the economy as infrastructure deteriorates, physical capital is not replaced, and worker skills degrade. We can add to that now a permanent loss of workers who exit the labor force. It lowers the potential growth rate of GDP by somewhere between 0.5% and 1.25%. When we have a goal of about 3% growth at the minimum and are struggling along at half that, the difference has been decisive. My back of the envelop computation is that the parsimony of shorting the stimulus and the austerian measures have cost the economy $7 trillion to date and continues to cost about a quarter trillion a year. This is not fiscal responsibility, it's fiscal suicide.

 

[TakeAStepBack]

What austerity?

 

[oldfart]

What austerity?

We've had this discussion before. No need to rehash it here. Do you have a comment on the CBO blog?

 

[Sallow]

The Economy is still on a growth trajectory, although the government can do alot more to insure that the workforce is healthy.

Unfortunately, even the Democrats keep the Senate and make some gains in the house? I don't see them overcoming the obstructions in the next 2 years.

Not much will get done domestically.

But that..will insure a Democratic wave in 2016.

 

[EdwardBaiamonte]

My back of the envelop computation is that the parsimony of shorting the stimulus and the austerian measures have cost the economy $7 trillion to date and continues to cost about a quarter trillion a year. This is not fiscal responsibility, it's fiscal suicide.

100% liberal and idiotic.
1) Stimulus taxes harm economy, not help
2) there is no austerity with $600 billion deficits, $20 trillion debt and $100 trillion unfunded

Liberalism harms with 20 million illegals, taxes and unions that drove 30 million jobs off shore, deficits that kill exports, and socialist health care that drives up cost 5 times what is should be.

See why we say liberalism is based in pure ignorance.