Fed chair Jerome Powell gave a speech yesterday that was mostly music to liberal ears. Powell said there was lots of room to push the unemployment rate down further than we used to think, and because of that the Fed won't put the brakes on the economy unless inflation clocks in well above 2 percent for an extended period of time. In other words, he thinks we should let the economy run hot for a while.
Powell also warned that the labor force participation rate had been declining, which is true. But he also said this:
Also concerning was that much of the decline in participation up to that point had been concentrated in the population without a college degree. At the time, many forecasters worried that globalization and technological change might have permanently reduced job opportunities for these individuals, and that, as a result, there might be limited scope for participation to recover.
Fortunately, the participation rate after 2015 consistently outperformed expectations, and by the beginning of 2020, the prime-age participation rate had fully reversed its decline from the 2008-to-2015 period. Moreover, gains in participation were concentrated among people without a college degree.
I don't get this. First off, here's the basic labor force participation rate for people with only a high school diploma:
Just as Powell said, it's been on a downward trend for several decades. It's also true that during the 2010-2015 period it declined a little bit more than the LFPR for college grads. Fine. But Powell went on to say that the LFPR for high school grads rebounded in the 2015-2019 period, so let's zoom in on that:
I see no gains here at all. It's close to flat for both men and women. Here it is for people with less than a high school diploma:
Once again, almost dead flat.
What gives? If you haul out your microscope you can just barely make out tiny gains during the 2015-2019 period, but certainly nowhere near enough to draw any conclusions from. So why does Powell think there's something here that suggests blue-collar workers were being pulled in from the sidelines during the late stages of the Obama recovery? What am I missing?
(It's worth noting that Powell used the age 25-54 workforce while I'm using the age 25+ workforce. This is because the BLS does not make the 25-54 numbers available to mere mortals like me. Powell, conversely, has a staff of statisticians who can give him whatever he wants at the touch of button. It's possible that this is the source of our disagreement, since his figures don't include retirements and mine do. I don't think that should make a huge difference, especially when you're comparing one time period to another, but you never know.)
POSTSCRIPT: Just as an aside, you might be interested in a long-term look at how high school dropouts have fared in the workforce:
There's a bit of an uptick during the late '90s, but it's been flat since then. For the past two decades, through recessions and recoveries, exactly the same share of the high school dropout workforce has been employed.
If there is inflation it will be because of people spending the savings accumulated through the checks and possibly supplemented unemployment. There may also be some lag in production for various reasons, making some things scarce, including entertainment and leisure services. The restaurants that survive, for example, may be able to get higher prices. Raising interest rates would do nothing to prevent this, although if rates are raised as high as they were in the 70's and 80's it would probably cause unemployment later and kill the recovery.
The assumption that inflation is anti-correlated with interest rates is just false. Raising rates to astronomical levels in the 70's and 80's did not prevent high inflation and cutting to zero (or below in Europe and Japan) after 2007 did not cause inflation to rise, contrary to many predictions. Too bad that real-world data has little effect on economists' dogmas.
Also the unemployment rate is not correlated with inflation as in either the Phillips curve or the NAIRU. High unemployment coexisted with high inflation in the 70's-80's and very low unemployment with low inflation in both the late 90's and before 2020.
Agree with skeptonomist on the lack of correlation between inflation and unemployment. or between inflation and interest rates. The relationships are at the very least far more complex, and structural factors and fiscal policy are strong influences. I do not expect much in the way of sector price increases -- many travel, entertainment and dining-out businesses are idling, not gone; and the barriers to new entrants are not that high, so supply is likely to come back at about the pace that demand does.
'Running hot' is a curious description for the current state of the economy. I would say 'treading water'.
Here's how Powell describes the group:
"Moreover, gains in participation were concentrated among people without a college degree."
So what we need to look at is all groups who have any educational level that do not include college graduates. That's not 25 & over, with a high school diploma. In is every educational level with less than a college degree. I'm too tired to work tis out tonight, but that includes everyone *without a high school diploma* AND everyone *with college attendance with no degree*, as well as the HR grads with no college (based on the data I could easily pull up; this would require combining the three groups pf HS dropouts, HS grads with no college and some college without a degree...
Maybe I'm wrong, but isn't it quite important to use age 25-54 data because older adults are more likely to have < college education, and so you'd be lumping retired < college folks into your chart by including all ages. Those retireds/retiring people would generate the gradual downward sloping line you observe. Age 25-54s might show this uptick Powell is referring to.
The BLS data for labor force participation by education levels is only available for age 25 & older.
Here's what I think is happening.
(1) In general people with more education have higher labor force participation rates (LFPR) than do people with less education.
(2) Education levels have tended to rise over time, so, for example, a larger percentage of the relevant population now has "some college" than it used to have, and so on down the line.
(3) for any given level of education LFPR might be constant or even have declined a bit.
(4) But the change in the distribution of people--toward more education--will cause the overall LFPR for those without a college degree to rise.
(5) It's a composition effect.