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Labor market conditions: good or not so good?

The April U.S. employment report showed that nonfarm payrolls rose by 288,000 from March to April. This gain was the largest since January 2012. However, other measures suggest that labor market conditions may not be as strong as the headlines suggest. One key measure that economists regularly track is the employment-to-population (EP) ratio. The numerator in the EP ratio is civilian employment. The denominator is the civilian population. Both series come from the household survey. The ratio thus captures key variables of labor market conditions, such as population growth and the percentage of the population that is working and thus participating in the labor force.

Why do economists look at the EP ratio? The key reason, in short, is that the EP ratio is a key input in a standard growth accounting framework. In this framework, real GDP is the product of (1) real GDP per worker, (2) the percentage of the population that is employed, and (3) the civilian population. The first term approximates labor productivity and the second term is the EP ratio. Mathematically, we can transform each of the three components into growth rates and then add them together to produce real GDP growth. Since population growth tends to change very little in the short-to-medium term, the growth accounting framework is useful because it shows why real GDP growth accelerates or slows. Thus, has real GDP growth changed because of changes to the growth of labor productivity, EP ratio, or some combination of the two? One reason why average real GDP growth during this expansion (2.24 percent) has been so slow is that labor productivity growth has been relatively slow: 1.48 percent per quarter (annualized) through the first quarter of 2014. As shown in the graph, the other reason is that the EP ratio is still below the level that prevailed at the trough of the past recession (second quarter of 2009). Since then, the EP ratio has declined by an average of 0.26 percent per quarter (annualized). Until the growth of the EP ratio strengthens, the pace of the economy’s growth will remain quite modest. That is, assuming population growth remains constant, if labor productivity growth doesn’t accelerate, neither will economic growth.

Suggested by Kevin Kliesen

How this graph was created: In FRED, enter “Civilian employment to population ratio” in the search box. The data are in levels (no transformation).

View on FRED, series used in this post: EMRATIO

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