There’s a lot of debate about the recent unemployment numbers. While the headline unemployment rate continues to creep downward, this is at least partly due to the fact that the labor force participation (“LFP”) rate is declining. This has led many to question whether the official unemployment figure is painting a picture much rosier than reality.
In this discussion over the “true unemployment rate,” one side argues that the declining LFP rate is a sign that the true unemployment rate is declining much slower than the official number. On the other end of the spectrum, some have argued that the falling LFP rate is merely the result of a demographic shift with an increasing number of “Baby Boomers” entering into retirement; for this reason, they see the official unemployment rate as a reasonable proxy. Naturally, there are many people who are in between the two extremes.
My personal take is that the declining LFP rate may be partly explained by demographics, but that overall, the job market is still unhealthy. If demographics were the primary cause of the low LFP rate, then we should see real wage gains as the supply of labor declined. This is basic supply and demand; a declining labor force should lead to higher prices.
Instead, we have seen subpar wage growth, which seems to suggest that demographics aren’t the main culprit. A quick Google search turns up a Wall Street Journal article showing stagnant wage growth over the past 12 months. Likewise, there’s an interesting and fairly detailed blog on this subject at Zero Hedge: The Mysterious Case of America’s Negative Real Wage Growth.
I see stagnant wage growth as a chink in the demographic argument, but I decided to take a closer look. It’s simple enough to eliminate the impact of retiring Baby Boomers on employment figures, by focusing on specific age groups. For this exercise, I decided to examine the 25 – 34 year old age bracket to see how unemployment and labor force participation has changed for this group since 1994.