Last week’s excellent jobs report was excellent.
EXCEPT … it showed no upward trend in real average hourly wages.
Some people have speculated this is because demographic shifts mean higher-paid, older Boomers are retiring as younger, lower-paid millennials come into the labour force, bringing down the average wage even as worker wages go up.
Deutsche Bank’s Aditya Bhave touched on the demographic shift in a research note on Friday. He pointed to the labour force participation rate, which has been declining steadily since 2008. Some, though not all, of the decline there comes from demographic trends. That means that some of what looks like slack in the labour market is just from a huge group of people retiring at the same time.
But that means that there’s also a meaningful part of that decline that comes from people dropping out of the labour force. Some of this, says LaVorgna, is also structural (it’s not coming back):
We estimate that demographics explain 39% of the decline in the labour force participation rate since 2008. Furthermore, data from a previous episode of declining labour force participation (2000-04) suggest that the effect of demographics is increasing, and that the portion of the decrease in participation that is not due to demographics also has a meaningful structural component. Together, these findings indicate that the labour force participation rate is unlikely to increase meaningfully even as cyclical strains on the labour market rapidly dissipate. In fact, a decrease in labour force participation, driven by demographics, might well serve as a tailwind in 2015 for the ongoing decline in the unemployment rate.
There’s also this:
As the labour market normalizes, the above-mentioned cyclical trends should reverse, slowing or perhaps even briefly abating the decrease in the labour force participation rate. However, the effect of demographics is so large that we do not expect a meaningful increase in labour force participation as long as the baby boomers are transitioning into retirement. If the labour force participation rate remains unchanged, the unemployment rate would fall as low as 4.7% even if the pace of job growth in 2015 falls by 10% relative to 2014. It is likely that a demographics-driven decrease in labour force participation will present downside risk to this estimate.
That’s good for the unemployment rate, but is it good for the economy?