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On The Labor Force Participation Rate
I was blown out by the Labor Force Participation Rate (LFPR) data released Friday. Down 4 tics to 62.8%. That sounds like no big deal, but it is. Either there is something out of whack with the data, and it will be revised, or there will have to be some serious rethinking by the folks who develop long-term economic models, and also at the Federal Reserve.
Consider the short term consequences. The Fed has hung its monetary hat on an unemployment rate of 6.5%. We have been told, time and again, that if the magic number of 6.5% unemployment is reached, the madness of US monetary policy will be relaxed. Should the LFPR continue to drop, the hurdle rate for changes to Fed policy will come sooner than is anticipated.
The Atlanta Fed has an interactive tool that looks at this (Link). It takes into consideration the variables of the unemployment picture and produces a report of how many jobs are needed per month over a given period, to achieve the 6.5% level. A few examples:
As you can see, the Fed's target can be reached in the next 12 months if the LFPR falls a bit further. I'm quite certain that should things unfold like this the new head of the Fed, Janet Yellen, will change the 'rules' and ignore the 6.5% target and continue along with ZIRP and QE. But if she does that, it will be at her (and our) risk.
Then you have the long-term side of declining LFPR. A low LFPR means that there are less workers earning taxable income. That translates into less government revenue. Payroll taxes (Social Security and Medicare) total 15% of wages. For an average worker making $40,000 a year that comes to $6,000. When the LFPR drops by 0.1% it means that there will be 180,000 less workers filling the tax bucket. The .1% drop translates into $1Bn less in tax revenue. The .4% drop in October therefore means $4Bn in lost revenue. It adds up quick.
All of the models used to forecast future federal deficits rely on a much higher LFPR assumption than today's reality. The Congressional Budget Office did a long term forecast of LFPR. The CBO hung its hat on a LFPR that is higher than 62.8%, meaning the forecasts of future tax receipts (and subsequent deficits) were wrong.
The 64.4% assumption the CBO used versus the 62.8% that exists today translates into 4m less workers contributing to the system, and those 4m workers (and their employers) will not pay $25B in payroll taxes. A 1/4 trillion adjustment over ten-years just due to a revision of the LFPR. That's real money.
I've looked at long-term forecasts for LFPR from CBO and BLS. They all have the participation rate dropping over time, but they do not have the drop occurring in the present. What if the 'New Normal' is a participation rate that hangs in the low 60% level for the next decade? It translates into much larger deficits at the Federal and State levels. It means that there will be less consumption as there will be fewer paychecks, and that means a much lower rate of growth of GDP.
So either the LFPR turns around and starts headed higher very soon (and stays higher for another decade), or the USA is in for a prolonged period of sub par growth and very high annual deficits.
Consider this chart of LFPR. The drop is accelerating. What are the odds that the long-term trend towards lower participation is going to turn around soon? I would say, "Not high".
Note: This analysis only looks at the consequences to payroll taxes from a drop in LFPR. There is is also lost revenue from State and Federal income taxes, and there is the broader drop in consumption to add into the mix. All in, the drop in participation is a very big deal.
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Actually, lowering the LFPR was on our radar over a year ago, even if in a slightly absurdist context:
Thought Experiment Of The Absurd: Zero American Unemployment Before The Next Presidential Election
Tylers: Have any of you come across a chart on national suicides?
Gub seems to care more about trans-fats than self-worth.
"The worst thing that can happen to a socialist is to have his country ruled by socialists who are not his friends."
- Ludwig von Mises
Something for nothing is 'pie in the sky,' that will work in short term. Not for the long haul. It will end.
Question is; - Will it end with a whimper? Or a BANG?
I hate Mises to peices and Ayn Rand was a nut job.
That's what Hitler said. Jewish communists followed by Arian socialists. What pisses me off is that Hitler is called far-right while socialism and communism are pretty much the same damn thing. Damn sophists.
"Communist Paradise." there's a problem with the existence of the two and now maybe three party system. plus we haven't even talked wages here. (and I'm not talking hospitalists but simple retail wages.) in the typical business cycle recession you get a big a big contraction in credit, a huge inventory build, prices fall but wages stay constant so eventually consumption returns wages rise and a "sense of normalcy" is back. not this time around...it wasn't until the past quarter that we had our big inventory build...that's coming awful late in the cycle. with no wage recovery "where are the exports again?"
Who wants to work for a living.
Where do I volunteer for the FSA?
I hope everyone knows the Fed is just blowing smoke up our butts when they mention employment rate targets....this isn't within the scope of monetary policy....only fiscal policy.
I laugh and roll my eyes when I hear them even discuss employment targets.....
And by Gawd the Fed will keep transferring public wealth to the billionaires until enemployment is down to 5%!
The table below shows the total number of college graduates that each state would need to achieve to be on target to reach the 2020 goal, with the corresponding degree attainment rate.
http://www.whitehouse.gov/sites/default/files/completion_state_by_state.pdf
by ensuring that 60% of the population in 2020 has received a college degree, we help ensure that our prison workforce is well trained
this is how we make America great again
this is how we compete in the global marketplace
and if you have qualms about being incarcerated and anally raped in a prison, consider this: you will receive the same treatment at a hospital when the new mexico police suspect you have failed to come to a full stop in a walmart parking lot.
maybe that 20 cent per hour job and a guaranteed meal in prison starts sounding pretty good, doesn't it?
now get back to your science/technology/engineering/math homework!
"now get back to your science/technology/engineering/math homework! "
STEM grads have horrific unemployment/underemployment rates. 2/3rds of US citizens with STEM degrees can't find STEM jobs. Even top grads can submit their resumes to the various Silicon Valley tech firms by the hundreds and not receive the basic "courtesy of a response".
Giant part of the unemployment problem is the million foreign guest tech workers brought in. If you figure that they're displacing Americans on a 1 for 1 basis, and remitting most of their personal economic surplus back to India, that's a huge amount of consumptive power sucked out of the domestic economy. And they tend to be inferior in quality as well, further damaging the industry.
I'm a STEM grad who moved into finance because TPTE (the powers that employ) in the US decided they would rather hire Indian engineering grads at one-quarter the cost of a good american engineer like myself. TPTB are investing in an outsourced economy, but they are trusting that they are getting 100% effort for the pay .... I was once asked to look in person at an Indian subsidiary, and I found that they were running a support business that used the resources of our company wholly to the benefit of the officers of the indian sub. All I can say is that you ulimately get something less than that for which you have paid..
The only thing you need to know about the future of the labor force participation rate is contained within this chart:
http://dareconomics.wordpress.com/2013/11/08/labor-market-data-qe-effects/
Gen-WTF is going to be hurting, when the Treasury categorizes living in Mom & Dad's basement as a taxable and reportable gratuity.
Just more examples of defining deviancy down.
We'll have 6.5% unemployment when the participation rate is 6.5% and they are all employed, or 13% participate and work half-time, and any one of an unlimited permutations that are bent to approximate reality.