Where Have All The Workers Gone?

By: Michael Ashton | Mon, Feb 7, 2011
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Protests in Egypt have temporarily receded somewhat. This was inevitable when the President ignored the protestors' "Day of Departure," calling the protestors' bluff in a bet that they wouldn't be able to back up the implied threat. As it happened, Mubarak was right about that.

However, as one of the more skilled politicians in the Middle East - and, dictator or not, he certainly is a skilled politician - he is likely to be aware that his alternatives now are to dial up the brutality so as to crush his opposition and retain control, to return to business-as-usual and risk a bloody coup, or to look for a graceful way to exit. Reports circulated today that the man was considering the latter in the form of possibly taking an "extended medical leave in Germany." German officials denied that any such visit had been requested, but it is an interesting and elegant segue from the current unstable equilibrium to a perhaps more-stable one.

Meanwhile, Egypt actually came to the capital markets for a record 3bln Egyptian pounds of 91-day Treasury Bills (about $500mm) and only managed to sell 2bln at a rate of 10.972%. That's somewhat surprising because the CDS market, around a 400bps spread, doesn't seem to signal that much distress. It is likely an issue of maturities: if something bad is going to happen to your Egyptian investment, it is likely to happen in the next several months rather than 3 years from now.


The Employment report last Friday was confusing, as it often is on a month-to-month basis and especially when that month is January. Stepping back to look at the longer-term view is often a useful exercise, however.

Many people have pointed out the steady decline in the Labor Force Participation Rate, which peaked in January 2000 and has been dripping lower ever since. It stabilized briefly in 2004-2007, but the second recession of the decade sapped it further.

It isn't unusual, as the chart below shows, for recessions to cause a small decline in the Participation Rate, but it is quite unusual for participation not to reach a new high in the ensuing expansion. In fact, not since the "Tune in, turn on, drop out" era of the 1960s has it happened in this country.

Labor force participation rate: what does the secular decline imply for unemployment?

It has only been a couple of years since the first of the Baby Boomers have hit retirement age, so this phenomenon is not entirely demographic in nature. Or is it? A 58-year-old who loses his job and was planning to retire in a few years anyway might, faced with a 10%+ unemployment rate, decide to call his (or her) current state of unemployment "retirement." And this person may or may not ever make it back into the work force.

The BLS measures labor underutilization in more ways than just the Unemployment Rate, of course. Over the last few years, the favorite measure of many economic bears has become the U-6, which represents "Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force." "Persons marginally attached to the labor force" means people who haven't looked for work in the last 4 weeks (and are not employed) but say they want a job and have looked for work sometime in the past 12 months. The current count of people who say they want a job is 2.80mm (not seasonally adjusted). Even during the robust expansion of the late 1990s, this figure never got below 1.04mm, so this class of worker has added about 1.5mm people to the underutilized work force in the last few years this category only got as low as 1.268mm in Sep 2007).

But I'm interested in the answer to a different question. What would the official unemployment rate be if the labor force itself wasn't shrinking? Suppose there were just as many jobs, but now the labor force was at the 67.3% peak of 2000 rather than the 64.2% rate it sits at now. The difference, on the current civilian non-institutional population, works out to another 7.5mm additional workers. That dwarfs the marginal impact of the "want a job" category. If we counted those people as unemployed, adding 7.5mm to the 13.863mm of unemployed already looking would push the Unemployment Rate from 9.0% to 13.9%. And if we create a "U7" that consists of "Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, plus all persons who were in the labor force and are no longer even marginally attached, as a percent of the civilian labor force plus people who are no longer in the labor force" that number would presently be at 18.5%.

Well, we produce unemployment rates to give measures of pressure or slack in the economy, and it isn't clear that my "U7" is valid as such a measure. The "labor force shrinkage" of 7.5mm people consists of marginally attached workers (folks who looked in the last year and say they want a job) as well as people who say they haven't looked and/or don't want a job. If that latter group (more than 5mm of them who once were in the workforce) are telling the truth, then they're not going to be competing for jobs and we don't need to worry about creating a job for them. On the other hand, it is useful for comparability because the other way we use the unemployment rate is to say "how much worse is the labor market now than it was at some point in the past?" In that sense, it is important to realize that one reason the unemployment rate isn't much higher than 9% is because the workforce is shrinking, a lot.

That shrinkage decreases the total possible output of the nation because it represents a tighter limit on one scarce resource. Right now, that's not a binding constraint, but if the economy returns to boom it could become so. In that circumstance, those people who subscribe to the "output gap" theory of inflation would become extremely concerned.

Now, I'm not one of those people. Scarce labor should increase real wages relative to profits, but as I illustrated the other day there's no real connection between the unemployment rate and inflation. Still, some people will disagree so I present this phenomenon with no apprehension that it will meet with universal agreement about its implications.


All of these philosophical musings, as you may surmise, occur today because nothing else really happened. Equity bourse volume was the lowest of the year to date at only 832mm NYSE shares. Stocks continued to rally (surprise!) and bonds were roughly unchanged. Commodities retreated a bit (Crude -2%) and TIPS sagged 1-2bps. But that was all.

There is also nothing on the calendar for tomorrow, so if I have any more philosophy in me then you'll probably be getting it! In the meantime, please be sure to check out my column (exclusive to Seeking Alpha) on Housing inflation, which should be posted (once the editors are done with it) by Tuesday morning.



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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