CREDIT SUISSE: The Shrinking Employment-Population Ratio Is Bad News For The Economy

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Photo: By anirudhkoul on Flickr

Most people are aware that the labour participation rate — the per cent of the population that is both unemployed and unemployed (i.e. the total labour force) — has declined precipitously since the recession,  now standing at 64 per cent.Take out the unemployed, and that ratio declines even further.

This figure, called the unemployment-population ratio, stood at 58.5 per cent in December — a 6.6 per cent drop from 2007.

Credit Suisse’s Neal Soss and Henry Mo recently wrote a paper discussing what effect this decline will have on GDP.

A long stretch of low employment-population ratio suggests that the economy loses the productivity that would have come from those “idle” workers. This syndrome reduces potential GDP, the only ultimate wellspring of fiscal solvency and economic well-being.

Why is the emp-pop rate falling?

They first point out that population has been ageing significantly. Due to these structural factors, the rate’s been declining since 1996.

But the Great Recession has put the decline on steroids.

Photo: Credit Suisse

The authors found that only one-third of the ratio’s recent acceleration can be chalked up to shifting demographics (ie ageing population). The rest results were brought on by cyclical factors (ie plummeting demand from a weak economy).

Soss and Mo believe the only way to address this problem is with counter-cyclical policies, which leads to the author’s final prediction: QE3 remains likely.

The FOMC’s decision to push its forward guidance on exceptionally low rates from “at least through mid-2013” to “at least through late 2014” underscores members’ sense of urgency in taking more counter-cyclical policy. In our view, QE3 is still likely. We expect a program to commence in the next few months with a heavy emphasis on buying mortgage-related securities.

Now click here to see the only states that have regained most jobs lost during the recession >

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