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Contrarian Capitalist
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An individual investor concentrates on macro-economic analyses and investment analyses
  • Structure Shifts In The U.S. Labor Market 0 comments
    Jul 14, 2014 5:15 PM

    Thanks to the blog post "Update Employment: Population Ratio vs Unemployment Rate 2007-2014" written by J. Lyons Fund Management, Inc., who presented the inspirational chart as following. JLFMI commented that they would like to see closing of the gap between the Unemployment Rate and Employment to Population Ratio before getting optimistic about the whole labor market.

    We extended the chart back to 1948, which is the earliest year that the data could go back to within FRED's database. It would be interesting to see how the chart would look like during the pre-depression era though.

    (click to enlarge)

    The history of the U.S. labor market as depicted above can be separated into three periods of time: 1948-1973, 1974-2007, 2008-present; each of them represents a structurally different U.S. labor market.

    Between 1948 and 1973: During post-WWII period, the Employment to Population Ratio had stayed between 55% and 58% after the structural distortions during the war. Meanwhile, the Unemployment Rate had stayed between approximately 3.0% and 8.0%. Based on the statistics provided by Bureau of Labor Statistics, the huge gap between the Unemployment Rate and the Employment to Population Ratio was largely due to the fact that less than of the women joined the labor force before 1970s. Despite the gap, the two data series had strong correlation with each during each crisis and non-crisis period.

    Between 1974-2007: The Unemployment Rate and the Employment to Population Ratio not only have strong correlation but also have very minimum gap in between the two data series. During this time period, the Employment to Population Ratio had increased in a fast pace due to the fact that more and more women joined the labor force.

    Between 2008-Present: The Unemployment Rate started trending lower but the Employment to Population has so far remained flat after the decline during the financial crisis. The big cross between the Unemployment rate and Employment to Population Ratio has never happened since the beginning of this data set sourced from St. Louis Fed.

    Only this time around, among all the other financial crises we had since 1948, the Employment to Population Ratio has not rebounded with the Unemployment Rate. This is a stagnant labor market that we are facing. It is the so called New Normal, as Bill Gross named. We believe that this trend will continue and create a huge gap between the Unemployment rate and Employment to Population Ratio like it was between 1947 to 1973 and there will not be strong correlation at all between the two data series as the current unhealthy labor market has so many distortions created by the Fed's monetary policies and government's fiscal policies. Based on our observations and research of foreign labor markets, the strong correlation between two data series without a huge gap from 1980s-2007 indicate a more natural and relatively healthy labor market.

    As one of Fed's dual mandates is a low Unemployment Rate, not high Employment to Population Ratio (which is a more fundamental picture), the fundamentals of the deeply distorted labor market will continue to be ignored until the current sea of liquidity goes away. That's when we see who is swimming naked.

    Bonus Chart: Japanese Labor Market

    (click to enlarge)

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