Kudlow and the Atlanta FED on Labor Force Participation
Brad DeLong ridicules the latest cheerleading from Lawrence Kudlow. It was this paragraph that caught my attention:
A recent study by the Atlanta Federal Reserve estimates that only 98,000 new jobs per month are required to keep unemployment under control. The reason? Labor-force participation has declined somewhat as more students remain in school, more workers take early retirement, and more moms stay home to have kids and attend to child care.
What study you ask (why can’t the NRO cite things properly)? Employment Growth and Labor Force Participation: How Many Jobs are Enough? by Julie L. Hotchkiss can be found here. Too bad Larry did not read it carefully as Julie knows what Brad noted:
In February 2003, the White House Council of Economic Advisors predicted that the administration’s tax cuts would contribute to an average monthly gain in jobs of 300,000. This figure was quickly picked up by the popular press and touted as a reasonable and necessary goal for the U.S. economy…Between January 2000 and August 2004, the U.S. economy has added 17,000 jobs per month on average. The Bush administration believed that its tax cuts would generate enough economic stimulus to create more than enough jobs to overcome these historical tendencies and to lower unemployment…the projected growth in employment was overly optimistic.
But Larry misrepresents what this paper was doing. Its purpose was to explain how employment growth could be weak and yet the unemployment rate could decline:
Between June 2003 and August 2004 the economy has created an average of only 107,000 jobs per month, which, based on the above calculations should have caused the unemployment rate to rise. The apparent paradox is that over this same time period (June 2003 to August 2004) the unemployment rate (depicted in Figure 2) has declined steadily: Paradox resolved: labor force participation.
Julie does note the popular stories as to why the participation rate declined such as this one Larry forgot to mention:
The negative relationship between the labor force participation rate and the unemployment rate is well-known. In order to be counted as unemployed, one has to be actively searching for employment. The number of people unemployed, then, can decline if the unemployed transition into employment, or if the unemployed stop looking for work. In this second case, the resulting decline in the unemployment rate is not accompanied by an increase in employment, but, rather, only a decline in the total labor force.
She also notes reasons why people might voluntarily leave the labor force including:
… family responsibilities (such as child care difficulties), being in school, being in poor health, …
Early retirement was briefly mentioned but she also noted that some of the Social Security proposals to delay the retirement date would tend to increase the labor force participation rate.
But Larry did not tell us that. Did he really read this article?