Tuesday, July 9, 2024

A historical look at labor force participation surges, real GDP, and unemployment


 - by New Deal democrat

In my discussion yesterday of why the Sahm Rule might be giving a false signal at present, I noted that “in addition to the 1980-81 double-dip period, significantly the only other time [a big increase in new entrants into the labor force leading up to a recession] even came close was 1968-69, when the Baby Boom was entering the labor force in droves.”

Let’s explore that more today, and why it is relevant to our current situation.

Between 1946 and 1963, 76 million Boomers were born to a population of 190 million at the end of the period. By contrast, for example, 73 million Millennials were born between 1981 and 1996 to a population that ended the period at 270 million. In other words, Millennials only accounted for 27% of the total population at that time, while at the end of 1963 Boomers accounted for a full 40% of the entire US population!

Here’s what happened when that huge generation entered the labor force, including for the first time most young women.

Most notably, as the prime age population surged, so on a secular basis did the unemployment rate. As the surge ended, the unemployment rate declined on a long term basis as well:

With so many new entrants to the labor force, lots of pressure was place on wages as well. When the surge subsided, real wages began to increase again:

Along with the surge in population, the labor force participation level surged as well, and the two gradually abated together also:

Over the long term, the civilian labor force has increased by an average of roughly 1% annually. So below let’s compare the YoY% increase in the civilian labor force minus 1%, with the unemployment rate:

Even there, with considerable noise, we can see that the outsized increase in the labor force that began as the Boomers entered it in the 1960s and ended in the late 1990s corresponded to a secular increase and then decrease in the unemployment rate with a delay of several years.

I want to emphasize that I am hardly advocating for a monocausal view of the economy or unemployment rate. Trade, tax, and business policies mattered, as most certainly did the OPEC oil shocks of the 1970s and their collapse in 1986. But the correlation is clearly there.

Now let’s take this same graph and apply it to the post-pandemic era. Note that this is using the Census Bureau’s population numbers, rather than the CBO’s much larger numbers:

Even using the Census Bureau’s numbers, the increase in the labor force has equaled that of the 1960s and 1980s. If we were to use the CBO’s numbers instead, it would look much more like the 1970s.

In short, the only other time in the past 75 years when we had a major surge in growth in the labor force, we also had a general uptrend in the unemployment rate on a secular basis. 

Finally, this secular uptrend in the unemployment rate included periods of very robust real GDP growth, frequently over 5% YoY:

So history does support the hypothesis that we can have an expanding economy even with a gradual uptrend in the unemployment rate caused by labor force increases.