The Labor Market: CKNAWWW and Time Series Analysis

James Hamilton is a proud member of CKNAWWW (Clueless Know-Nothing Analysts of the World Wide Web) and is a master of time series analysis:

It seems very hard to quarrel with the statement that any given month’s value for the labor force participation represents the confluence of different factors, some resulting from trends that are in all probability quite benign, and some representing cyclical economic swings. Whenever somebody looks at such a statistic and claims to have inferred what it is saying about purely cyclical forces, they must have used some method for distinguishing between these two kinds of forces … Any satisfactory statistical treatment of the question would regard this as a signal-extraction problem, where one would try to decompose the change in any given month’s labor participation figure into “trend” and “cycle.” There are certainly time-series methods that have been proposed for doing that sort of thing. But they rely in a very fundamental way on knowing the statistical structure of what constitutes a trend and what constitutes a cycle. I just don’t see what we could claim to base such assumptions on in this context.

David Altig reviews an interesting time series analysis from Jack Bernstein (hat tip to Max Sawicky) and writes:

There is a deep problem associated with using this sort of trend/cycle breakdown to measure “slack” or “participation gaps.” Think of labor force participation over the course of a year, and suppose that for some demographic group the participation rate is rising over the period of time. Despite a positive trend, you will find that the participation rate will still fluctuate over the course of the year. Over the seasons, for example, as summer vacations and winter holidays kick in. Or every weekend. We would never think of calling these sorts of fluctuations “gaps.” But if this is so for a weekly or seasonal frequency, why not over the span of a business cycle? To put it another way, efficient changes in labor force participation can have both temporary and permanent components. Temporary does not equal “bad” or “perverse” or “suboptimal” or “inefficient.” Yet calculating gaps as deviations from a trend treats them just that way.

OK, I’ll admit that the mere fact that the employment to population ratio now is below where it was in the late 1990’s is not definitive proof that the labor market is weak. But then those Bush supporters who keep touting the employment growth of the past couple of years as being proof that the labor market is roaring have not done the kind of careful analysis that David Altig and James Hamilton are calling for. Also, the fact that real wages have not risen even as labor productivity has seems to me to be additional evidence that the labor market is weak (even if employers have to pay a lot more for the same employee health insurance).