Is labor force participation dropping due to a falling labor share?
A comment on a previous post said that the unemployment rate is under-measuring the true unemployment rate due to people having withdrawn from the labor market. The low labor force participation rate would reflect this view. Is the 6.1% unemployment rate a reliable measure of un- and under-employment?
One model for the supply & demand in the labor market plots labor share against a quantity of labor.
Labor on the x-axis can be represented by the unemployment rate.
The graph shows that the unemployment rate followed theoretical limits of supply and demand in the model since the 1950’s.
We can also put the labor force participation rate on the x-axis.
The scatter plot has data from 1950 to 2014. The orange line is 1950 to 2001. The blue line is for data since 2001.
From 1950 to 2001, labor share slowly fell while labor force participation rose. Then in 2001, the pattern broke. Labor share started to fall at a faster pace, and labor force participation began to fall.
The graph suggests that the orange line described the labor demand curve in the model of the labor market… and that the blue line is now describing the dynamics of the labor supply curve. Thus, firms would have had an easier time finding labor before 2001. And we are currently seeing that firms are having a harder time finding labor.
Undoubtedly there are currently demographic influences of many people retiring. However, even as labor force participation has fallen, the unemployment rate has risen to a new level too. The implication is that people are leaving the labor market due to insufficient wages, which would be linked to labor receiving a less valuable share of national income. Labor is then less willing to supply their labor.
This is basic supply & demand. If you are offered a lower value, you are then less willing to supply your good or service… even if the buyer (firms) expects you to take whatever wage they offer because you have to survive.
- Did the rapid drop in labor share cause more people than necessary to withdraw their supply of labor?
- Has the unemployment rate risen to a new level due to the lower labor share?
- Will the labor force participation rate stay low as long as labor share stays low?
- Is the unemployment rate a true measure of unemployment/underemployment considering the low labor force participation?
I say yes, yes, yes, YES… The numbers are right.
What do you say?
No, the labor force is dropping because of Boomers going bye bye. Don’t forget the 1920 census was the beginning of the decline in population in America sans the mid-40’s, late 50’s surge.
Move on from this arguement.
And what cohort is even bigger than the Baby Boomer cohort and entering the Civilian Labor Force now?
Let me ask you… So if boomers are leaving the job market, why doesn’t the unemployment rate come down more? There should be less people for the same jobs, right? Why has the unemployment rate risen to a higher level?
What is the source of those numbers?
Here is a link to FRED for the labor force graph…
Here is a link to FRED for the unemployment graph…
So what changed in or around 2001 that would cause such a change.
It is tempting to say Bush Tax Cuts, but we have had tax cuts before that did not cause such a turn. Was there some other policy change in that bill or another that would have caused this?
It is a global phenomenon. Germany and China began to lower their labor share in a huge way around the turn of the century. They put pressure on other countries to do the same to try and keep pace and compete.
The ultimate effect is to lower demand, lower labor supply and raise unemployment in some countries. At some point, labor share has to start rising among advanced countries.
If you read Michael Pettis, he explained it well.
I must be missing something in that article. While he does explain our global inter-connectivity, I see nothing about what what policies Germany and China enacted that resulted in such a downturn in the labor share.
Are the lines in the third plot also the theoretical demand and supply boundaries (or are they linear fits to the data)? If so, did we just walk down one boundary and turn the corner when we hit the other?
Germany made a policy to lower wages years ago… around the turn of the century or thereabouts… This policy lowered domestic consumption and increased national savings. Those national savings were then exported to countries like Spain. The trade surplus grew in Germany from balance of payments. Now you see other countries in the Euro zone trying to do the same, but it is creating a lot of unemployment.
China on the other hand is just simply a cut-throat culture. If they can get away with paying nothing to a worker they will. The owners simply want as much profit for themselves as they can get. Of course, not all Chinese are like this, but in comparison to the old standards in the US, China is very cut-throat. So it may not have been a policy to lower wages like in Germany, but rather a cultural process to take advantage of poor farmers from the interior.
Have you read about the bullies that would stationed in and around the factories? Have you read about beatings from the bullies if the workers complained about their wages? China has had to try and change some of that but it is hard, because being ruthless and greedy is so much a part of their inner psychology. Their increasing prominence in the global economy is helping to bring down pay standards across advanced countries.
Those lines in the 3rd graph are linear fits (regressed trend lines). When labor share started to accelerate its downward trend, people started to retire more and be less willing to offer their labor. Instead of labor entering the labor market, they started to leave the labor market. When that change happened, we started moving down the labor supply curve.
Was some law passed in Germany that lowered wages?
Here, I think, people would just go even deeper into debt, and we would still have a trade deficit.
I do not remember any law in Germany. But there were centralized meetings between management and unions. They reached a long-term plan to hold down wages nationally.
I agree with you about the US. People can go into debt easy here. The US has actually lowered labor share and kept real wages stagnant. But to what avail? The trade deficit does not go down. Import prices are now coming down, so it is hard to grow businesses here. People earn less, and import prices are falling. So the foreign production is able to maintain their market share.
Someone asked what happened to change the labor structure after 2001.
Management in the new millennium has developed a new prerogative. while nobody would publicly admit to believing “greed is good”, their actions and justifications for their actions say just as much.
I think that a lot of what has caused the change is the unfettered access by companies and banks to an almost unlimited supply of free money. These institutions and power brokers have used this cash to buyback shares, pay generous stock options to corporate executives and to consolidate their corporate power against all foes – competitor and consumer. Just consider one company, Goldman Sachs, and how they responded to this windfall:
It’s not hard to be greedy when everyone on Wall Street is doing it. Those people who don’t get it are called “Suckers” and they are Wall Street’s primary customers that include not just individual investors, but also huge public pension investment funds and other large institutional investors. This cash has created an artificial economy that cannot survive higher interest rates. It will be interesting to see how long it lasts…perhaps as long as our perpetual war.
It’s also true that many companies shed employees and benefits during the recent depression that were never replaced. There are lots of stories of people who survived the cuts but were required to pickup additional responsibilities from their fired co-workers. I think this has had a profound impact on employee morale nationwide and the supply of labor.
Many employees understood the need for companies to react quickly to the downturn and for workers to make “personal sacrifices” (a term I remember hearing often). It was expected that once things started to return to normal, things like people and benefits would be replaced, but this never happened, or happened in a disadvantageous way.
Employees are well upset at my old employer, UPS, for their treatment during this time when they made real sacrifices to their 401K and stock plans that were never repaid in any way – not even a “Thanks”. The corporate social contract, or whatever was left of it, was shattered – even in a 100+ year-old management-controlled company like UPS. Gen Xers are finally getting the message that Millennials already knew: Corporations are not your friend and won’t be there to help you when you need them (unless they can make money on it).
It’s not hard to understand why income inequality has ballooned in the last decade. In this new economy, power itself has become monetized. Price is de-linked from supply and demand (which is being “managed” by the market makers) and becomes a vegas-style casino game with the house holding all the odds. This was Enron’s game, and it is much more slyly and successfully played today by the 0.1% oligarchs in companies like Goldman Sachs (see “Vampire Squid” above) and the oil companies/commodity traders like Exxon Mobil and the rest. That’s also why my cable and internet bill keeps going up while adding no new features or value.
The sickest part is that Wall Streeters believe that if something can be done to extract profit (without doing jail time), it should and must be done. It’s fiduciary responsibility zombie style and it’s killing us. I think throwing a few high profile examples behind bars would be a good first step in the right direction…. I nominate James Dimon and Lloyd Blankfein as perfect test cases.