© Curtis J. Simon
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I see two possible channels via which tapering might impact the labour market. First, if long term interest rates rise, the housing market and other interest-sensitive industries would be adversely affected. Second, the stock market could fall if interest rates rise and cause investors to allocate a higher fraction of their portfolios to bonds. The fall in the stock market could exert a negative wealth effect on consumption, and thus negatively impact the labour market. That being said, I am more concerned with the long run than the short run, and that it is prudent to begin tapering now, particularly as many market participants appear to have prepared themselves for it. I believe that the labour market can adjust relatively quickly, particularly in response to small reductions in the bond-buying programme.
Many analysts argue that the current 7.6% unemployment rate does not reflect the real situation in the labour market. Instead, they believe that the U-6 rate is a more accurate reflection of national employment. Thus, if one counts those who want a job but are no longer looking, the number of people out of work is about 14.3%, according to U.S. government data. What to your mind is a more accurate measure, which shows the true picture of the labour market?
All measures of unemployment are problematic in that they depend on whether or not an individual, who does not have a job professes to be looking for work or not. Along with many others – Professors Edward Lazear to name just one – I believe that the best picture of the labour market is provided by the employment-to-population ratio. Because this measure has been criticized for not accounting for the age of the labour force, which has been rising in the US, I focus on the employment-to-population ratio for individuals of prime working age, 25-54 years old. This ratio stands today at around 76%, lower than at any time since 1984, and just about 1 percentage point higher than the 2009 recession low.
Like the "official" rate, the U-6 essentially doubled between 2007 and 2009; unlike the official rate, it is not falling as fast. What are the reasons behind such a sticky U-6?
I believe that the current sluggish state of the labour market is less a function of anything that happened during the financial crisis, which has long since passed, and more a function of (1) labour supply incentives and (2) uncertainty regarding current and expected future regulation and taxes. This belief is hardly original. Professor Casey Mulligan has calculated that the introduction of new and expansion of existing support programmes have raised implicit marginal tax rates on labour supply by 5 percentage points. The number of individuals on permanent disability has also risen, presumably not as a result of an increase in injuries on or off the job. Economists such as Professors Gary Becker, John Cochrane Steven Davis, and Kevin M. Murphy of the University of Chicago have written about the role of uncertainty, regulation, and taxes. Professor Robert Lucas has gone so far as to suggest that the long run rate of US economic growth might be permanently lower due to a combination of these factors.
Current labour force participation rate stands at 63%, compared to 66% during the pre-recession period. While 3% seems to be not a drastic change, but as estimated that extra 3% would take the number of officially unemployed people up to about 18 million from 12 million. When do you expect the labour force participation rate to reach the pre-crisis level and what would drive that change?
I do not anticipate the labour force participation rate to reach pre-crisis levels within the next year because the factors I have mentioned: regulation, taxation, and benefits given to the non-employed are likely to remain in place. There are positive developments, though. For example, Europe and China appear to be on the mend. However, I do not believe that their recoveries will be sufficient to more than make up for the US's self-inflicted wounds.