Take a look at this interesting picture sent in by NorthGG. It shows the month on month gain in non-farm payroll (NFP) against the twelve-month growth in the workforce. I know workforce growth is somewhat endogenous, but nevertheless, the relationship is good with workforce growth lagging just a bit behind jobs.
I take away two lessons from this picture. First, and by far the most important, demographics matter. In the 1970s, the first cohort of baby boomers is just entering the workforce en masse. As a result, independent of the point in the cycle, workforce growth is relatively high. This means that equilibrium job growth also has to be high. By the 2000s, the first cohort of boomers is starting to retire. Equilibrium job growth is low. Losing 500,000 jobs in 1970 is different than losing 500,000 jobs now. Since fewer new entrants need jobs, we need fewer created jobs each month. 500,000 lost jobs creates a smaller "jobs gap" now than it did in 1970. Its still bad, just not as bad as it used to be.
Second, workforce growth lags the cycle a bit. We should not expect to see the bottom in terms of job losses until the twelve-month growth rate of the workforce starts to plummet to zero. I see a little bit of downward movement in the picture above but not a nosedive. We are not yet at the bottom.
Thanks again to NorthGG for sending in the intriguing picture. I will point you toward three interesting economic papers on demographics. First, a recent paper in ReStat studies the relationship between productivity and demographics. Second, Mankiw and Weill explained the 1990s downturn in house prices using demographics. This issue is explored further in a Fed paper from a few years ago. I like the way this paper compares the situation in the United States to that in Japan.
I believe the effects of demographics, in particular the effects of exogenous fertility shocks on the labor force, are among the most understudied factors in economics. Of course, many economists don't believe fertility shocks are exogenous. They are probably right.
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1 comment:
Takes awhile to read! Investment is straightforward, profits (growth) are positive when the IRR is greater than the funding cost. Government borrowing will not prime the pump unless underlying projects are profitable. With deflation setting in, borrowing at positive yields is not profitable unless input prices fall even further. Prices have much further to drop. The private sector will not borrow money at any price now. Policy makers continue to support prices and this is a waste of money and will only exacerbate deflation.
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