A Prime-Aged Look At The Employment-To-Population Ratio

by: The Federal Reserve Bank of Atlanta

By John Robertson

Trying to interpret changes in labor utilization measures such as the employment-to-population ratio is complicated by the fact that they do not refer to the same set of people over time. The age composition of the population is changing, and behavior can vary across and within age cohorts.

This issue is illustrated in a recent New York Fed study of the employment-to-population ratio by Samuel Kapon and Joseph Tracy. This ratio nosedived during the recent recession by about 4 percentage points and has barely budged since.

This measure of labor utilization is the clear laggard on any labor market recovery dashboard. But the authors show that it is not so clear that the employment-to-population ratio is really so far from where it should be, once you control for the fact the employment rates tend to be lower for younger and older people and that the age composition within the population has shifted over time. This idea is similar to the one used to estimate the trend labor force participation rate in this Chicago Fed study by Daniel Aaronson, Jonathan Davis, and Luojia Hu. The issue of controlling for dominant demographic trends is one of the reasons we at the Atlanta Fed decided not to feature either the overall employment-to-population ratio or the overall labor force participation rate in our Labor Market Spider Chart.

A simple, and admittedly crude, alternative to computing the demographically adjusted employment-to-population ratio trend is to look at a segment of the population that is on a relatively flat part of the employment (or participation) rate curve. A common standard for this is the so-called prime-aged population (people aged 25 to 54). These individuals are less likely to be making retirement decisions than older individuals and are less likely to be making schooling decisions than younger people. Of course, this approach doesn't control for within-cohort factors like educational differences.

So what do we find? The prime-aged employment-to-population ratio declined almost 5 percentage points between the end of 2007 and 2009 (versus 4 percentage points overall) and since then has recovered about 25 percent of that decline. Using the end of 2007 as reference, the Kapon and Tracy trend estimate has declined about 1.7 percentage points, which implies the overall employment-to-population ratio, by not continuing to decline, has improved by about 40 percent.

Then what does the analysis say about labor utilization in the wake of the recession? Once demographic factors are controlled for, both aforementioned measures indicate that labor-resource utilization has improved relative to trend. In fact, as Kapon and Tracy note, the relative improvement would be even greater if you believed that employment was above trend before the recession.

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