Sunday, December 15, 2013

Preparing to figure Worst-Case Unemployment

Part four in a series that starts here.

On Thursday I took a first look at worst-case unemployment, what the unemployment rate would be if everyone who was expected to stay in the labor force actually stayed in the labor force (and if people who were expected to enter it, entered it.)

When people who are looking for work give up, when they stop looking, they are no longer in the labor force. So the labor force gets smaller. Then the number in the labor force who are not working becomes a smaller percentage of the total labor force. So the unemployment number goes down.

The unemployment number goes down, not because there are more jobs, but because there are fewer people trying to get a job. This is what John Taylor and others have been pointing out.

Taylor showed a graph comparing the official unemployment number and what unemployment would be if everyone who was in the labor force, stayed in the labor force.

Well, I took an interest in that graph, and decided I wanted to see if I could duplicate it. The numbers I used on Thursday I don't think were the right versions. That's why I did all that double-checking on Friday and Saturday, finding number series where the ratio is a good match for the Labor Force Participation Rate and the number of persons unemployed and the number employed.

Now that I have the right numbers, maybe I can duplicate the worst-case graph.

In his post of 23 November 2013, John Taylor links to a paper by Christopher Erceg and Andrew Levin: Labor Force Participation and Monetary Policy in the Wake of the Great Recession. I couldn't get to that paper at SSRN. But Taylor has an older post that links to an earlier version of Erceg and Levin's paper (PDF, 50 pages).

Erceg and Levin refer to a BLS forecast of the Labor Force Participation Rate from back in November, 2007 -- "just prior to the onset of the recession," they note.

At BLS I found Labor force projections to 2016: more workers in their golden years (PDF, 20 pages), from the Monthly Labor Review of November 2007. Table 3 in that PDF gives civilian labor force participation rates for 1986, 1996, 2006, and a 2016 projection. The annual growth rate is projected to be -0.1 percent for the 2006-2016 period. Only a slight decline in the Labor Force Participation Rate was anticipated.

I'm thinking that is where Erceg and Levin got the forecast they show on this graph:

Graph #1 (Source: John B. Taylor)
Yes: On page 49 of the Erceg and Levin PDF, they plot several subsets of the Labor Force Participation Rate projection, and refer to the November 2007 issue of the Monthly Labor Review.

I see Bill Mitchell is on a related topic.

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