Delving into the
Employment-Population Ratio

by Ron Johnsey on January 9, 2014

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Many measures of labor market conditions attempting to assess economic conditions are available to economists and analysts. The two best known metrics are the unemployment rate (U3) and the level of monthly employment gain.

The commonly reported U3 rate is a measure of persons classified as unemployed because they do not have a job but have actively looked for work during the previous four weeks. These people are also currently available for work. The November unemployment rate was reported at 7.0%, down from 7.3% in October and 7.8% in November 2012.

The U3 rate does not, however, take into account discouraged workers who have dropped out of the labor force, those marginally attached to the labor force, and those working part time for economic reasons. The combined rate of these metrics currently stands at 13.2%.

Another useful but less-known measure is the employment-population ratio. This tells us what proportion of the working-age population is employed, and is a real measure of economic health and the state of the recovery. Changes in the employment-population ratio demonstrate whether the economy is generating jobs fast enough to provide employment for the increasing total non-institutional population (excluding the incarcerated). The employment-population ratio is calculated by dividing the total non-institutional population (those 16 years and older) into the total number of employed.

An examination of both the employment-population ratio and the labor force participation rate (which is discussed later on in this article) are painting a somewhat less-than-rosy overall picture of the economy. Let’s examine the chart below.

Emp pop rat and lab for par rat

The employment-population ratio, indicated by the red line, generally increases during periods of economic expansion and decreases during recessions. The ratio does not begin to increase immediately after the end of each recession, but bottoms out and begins trending upward within one to two years of the recession’s end

Although the Great Recession lasted twice as long as previous recessions and it could be expected that the ratio would take longer before the employment-population ratio hit bottom and rebounded, this has not been the case so far. The employment-population ratio, in fact, has been sliding sideways since 2010, since hitting its lowest level since 1983. In other words, the growth rate in the number of employed adults is tracking at about the same rate as the growth in population. Translating this further, the economy is barely generating enough jobs to keep up with population gains.

The other series in the above chart – one that is frequently mentioned in the news – is the labor force participation rate. This ratio, represented by the blue line, is the proportion of the working-age population that is in the labor force, either working or looking for work.

The denominator in the labor force participation ratio is slightly different than that of the employment-population ratio. The labor force participation rate uses the civilian non-institutional population that excludes both active members of the armed forces and the incarcerated population.

The civilian labor force participation rate began to climb steadily after the mid-1960s as more women joined the workforce. The rate peaked at 67.3% in early 2000 but averaged 66.3% from 2001 to 2007 before the Great Recession hit.

While the employment-population ratio has been flat during the recovery, the labor force participation rate has actually declined since the end of the recession to its lowest level in 35 years. Part of that decline is due to demographic shifts as more baby boomers retire. Furthermore, these retirees are not being replaced by echo boomers and others who have left the labor force to return to school or have given up looking for work for the time being as the economy continues its slow recovery.

Taken in tandem, these two figures do not paint an inspiring picture of economic strength and recovery. Both stats bear watching for signs that the economy is generating enough jobs to employ not only the growing working-age population, but also the unemployed, underemployed and discouraged workers or students wishing to enter (or re-enter) the workforce.



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