Labour Market Data and the Economy

If there is one thing we that we been able to demonstrate again and again here at DM it is that demographics and economics are tightly interconnected subject areas. One of the crucial aspects of this interconnection is the economic notion of the macroeconomic supply side where we are looking at the number and characteristics of the workers available for an economy. This is a pretty simple conceptualization and I hardly think anyone would argue with me here. Yet, in the real world the relationship between demographics and the supply side is a dynamic relationship which fluctuates as a function of the ever changing nature of a country's population and labour force.

My main source for this entry is a speech on US labour market data by the President of the Federal Reserve Bank of Chicago Michael H. Moskow. Now Edward has already drawn attention to this speech in a very comprehensive post over at Bonobo Land but I thought that I would point DM readers in Moskow's direction because it is a really thorough speech which raises a lot of important and tought provoking points. Why then is this speech so good?

In terms of the perspective of Moskow adopts, he quite naturally looks at the need to scrutinize US labour market data in order to accurately gauge the level of potential output of the US economy going forward and as a result to think about the issue of price stability in the economy. However, what is particularly interesting is Moskow's focus on the evolving labour market and as such the evolving benchmarks we use to analyze an economy.

An important observation is that labor markets are constantly evolving, which can cause these benchmarks to change. The demographics of the workforce are constantly changing. New labor market institutions have altered the way firms hire, organize, and pay their employees. Monetary policy could go off track if we don't recognize the impact of such structural changes on the economy and the benchmarks we use to evaluate the incoming data. So today I would like to take a more detailed look at a number of these structural changes and how they have influenced some of our important benchmarks. And as I go through them, you'll see a recurring theme: research can provide us insights into the workings of labor markets that can be very valuable in making well-informed monetary policy decisions.

A good example of the above would be the recent discussion we also had here on DM about the changing labour participation rate in the US and how this affects the potential output and subsequent monetary policy decision. Another key quote is the one where Moskow - unlike many of his mainstream US labour market economist colleagues - dares to include demographic indicators as an integral part of the labour market benchmark he is trying to account for.

Of course, the proper benchmark depends on other factors as well, including growth in household wealth, the long-run health of Social Security and Medicare, and trends in fertility, life expectancy, and especially immigration. Major changes in our immigration policy, for instance, could have a big impact on the rate at which the workforce expands and, therefore, the estimate of employment growth consistent with sustainable economic growth. Research by labor economists can be used to improve the estimates of the effects of these factors on the growth in the labor force. This can help us better anticipate changes to our employment benchmarks in the future.

Now all of this was just a quick pointer, as the topic is extensive, and is only now really begining to raise its head in current macro debates. However I highly recommend a closer look at the whole speech and if you want some commentaries and thoughts as well, then Edward's post linked-to above is a good read too