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Kocherlakota says the US is under-employing its human resources

Surbhi Jain

Is the FOMC achieving its goals? Narayana Kocherlakota weighs in (Part 7 of 8)

(Continued from Part 6)


To estimate the unemployment rate, the Census Bureau asks people two questions: Are you working? And, if not, have you looked for work in the past four weeks? The unemployment rate measures the ratio of the second number—recent job searchers—to the sum of the two numbers (recent job searchers and workers).

This means that the unemployment rate can decline for two reasons:

  1. Because more people are finding work
  2. Because fewer people are looking for work

In his speech, Kocherlakota highlights that most of the declines in the unemployment rate since October 2009 have occurred because the fraction of people who are looking for work has fallen. This characterization is borne out if we look at the evolution of the fraction of people over the age of 16 who have a job—what’s called the employment-to-population ratio.

In March 2007, the employment-to-population ratio was over 63%. The employment-to-population ratio fell sharply during the Great Recession and bottomed out at just over 58% in mid-2011. The percentage has risen little from this low point and remains lower than it was at any time between 1986 and 2007.

The Great Recession, also called the housing bubble, was a result of Americans with the poorest credit being leant money to purchase houses they couldn’t afford. It impacted the U.S. economy badly. Broad market ETFs like the SPDR S&P 500 (SPY), and the iShares S&P 100 (OEF), real estate ETFs like the Vanguard REIT Index ETF (VNQ), and banks like Citigroup Inc. (C) or Bank of America (BAC) all saw their prices slump.

It’s true that, even without the Great Recession, demographic forces would have led to some decline in the employment-to-population ratio since 2007. As the Baby Boomer generation—born between 1946 and 1964 (a period of a noticeable temporary increase in the birth rate)—ages, the fraction of retirees in the population grows steadily. But these demographic forces are still not large enough to account for most of the decline in the employment-to-population ratio.

One way to see this—but not the only way—is to focus on people who are outside the normal retirement age, which is the fraction of the population aged 25 to 54 who have a job. This ratio has improved from its low point, but it also remains lower than at any time between 1986 and 2007.

Even among those who have a job, there are signs that the economy is significantly under-employing its human resources. The Bureau of Labor Statistics reports each month on the number of Americans who are working part-time and would like to work more hours but are unable to obtain those additional hours. That fraction of the labor force has fallen since highs of 2009, but it remains unusually high.

Kocherlakota summarized his observations on the state of the labor market and shared his view on the FOMC’s performance with respect to its goal of attaining maximum employment. Read on to the next part of this series to find out more.

Continue to Part 8

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