May 13, 2015
There are many analysts of the economy, including many at the Federal Reserve Board (Fed), who believe the labor market has largely recovered from the recession and that it is time for the Fed to start raising interest rates to slow economic growth. At 5.4 percent, the unemployment rate is not far above its pre-recession level, but much of this is due to the fact that millions of previously employed people have dropped out of the workforce and are no longer counted in the official unemployment rate. One way to look at slack in the labor market is to analyze the percentage of people who are working using the employment-to-population ratio (EPOP). The EPOP for the population 16 years old and older is four percentage points below its pre-recession level, or 63.3 percent in January 2007 versus 59.3 percent in April 2015.
Some analysts have explained this drop in the EPOP using arguments that hinge on changing demographics, often citing baby boomers who are now reaching retirement age. However, this can only explain a small portion of the decline in the EPOP. The story is little changed if we age-adjust the EPOP, meaning that we look at the change in EPOP for each age group, keeping demographics constant. This removes most of the impact of the aging of the population as a whole on the EPOP. Judging from the results, employment looks worst for African Americans and Hispanics.
The chart below shows the age-adjusted EPOP through the recession and recovery for whites, Asians, Hispanics or Latinos, and African Americans. Measured against its pre-recession level, the EPOP for whites was down by roughly 2.0 percentage points using the most recent data. The EPOPs for Asians, Hispanics or Latinos, and African Americans were down by 2.25 to 2.5 percentage points. EPOPs for Hispanics or Latinos and African Americans had fallen the most at the depths of the recession.
This picture looks worse when we consider that at the start of the downturn African Americans already had much lower EPOPs. In fact, the age-adjusted EPOP for African Americans at the start of the downturn was lower than that of whites at the trough of the downturn. In addition, the gap in age-adjusted EPOPs between whites and African Americans has been expanding from just over 5.0 percentage points before the recession to more than 5.5 percentage points in the most recent data.
This data shows that the labor market as a whole is still far from recovering from the recession especially for African Americans and Hispanics. There will have to be considerably more growth in employment before the labor market for African Americans is as strong as it was before the recession. Furthermore, the pre-recession period was not one in which the labor market was exceptionally strong. Arguably, the economy could return to the strong labor market seen in the late 1990s with the right mixture of fiscal and monetary policies.
FedWatch is a semi-monthly online publication of the Center for Economic and Policy Research (CEPR) providing analysis by Dean Baker and colleagues of issues related to the pending Federal Reserve decision on interest rates.
