EDITOR NOTE: Price stability and maximum sustainable employment make up the Federal Reserve’s “dual mandate.” If you’ve been following the Fed’s statements since the onset of its pandemic response, you know that the Fed is looking to the labor market to gauge the duration and effect of its policy toward interest rate suppression--holding rates near zero, sustaining cheap money to enable economic growth. Inflation in the labor market is specifically what the Fed is watching out for--a potential sign that’s assumed to occur once employment reaches a “maximally sustainable rate.” But what’s the Fed to do if a record number of people are quitting their jobs? What if older workers are pushing for a rapid rise in retirements? What if a large majority of labor recovery consists of teenagers ages 16 to 19 getting back to work (which presents its own unique set of problems for future growth, according to academic experts)? What of “maximum employment” then? It sort of messes up the Fed’s plan doesn’t it? Well, that’s what’s happening. Jerome Powell’s response: “We have to be humble about our ability to understand the data.” But not humble enough to implement aggressive monetary policy based on overconfident and misguided assumptions.
Population-adjusted data shows a huge surge in retirements and that has the Fed concerned.
The lead chart is from the Role of Retirement by the Dallas Fed.
Role of Retirement
Since February 2020, the economy-wide employment-to-population ratio has declined by 3.2 percentage points, or by about 8.5 million workers. About 1.6 percentage points (4.1 million people) of the decline consists of unemployed workers who will likely eventually return to employment.
The remaining roughly 1.7 percentage points (4.4 million) represents a higher share of individuals not in the labor force—meaning that they are not currently actively looking for work.
Chart 4 [lead chart above] shows how a hot labor market in 2018 and 2019 likely prompted many older workers to delay retirement, causing the share of the population in retirement to increase more slowly than the rate of aging would have implied. We see that during 2020 and 2021, the rate of retirement returned to its 2017 trend. How this trend unfolds—along with the degree to which caregiving, unemployment benefits and other special factors influence employment—will impact the ultimate size of the available workforce
Teenage Employment Fully Recovered
One group that is increasing its participation is teenagers. According to the latest employment report, the employment-to-population ratio for individuals age 16–19 increased to 32.8 percent in April, exceeding its prepandemic level of 32.1 percent in February 2020.
This increase in teenage employment accounted for approximately 78 percent of the increase in employment in the April 2021 jobs report. While this may signal increased opportunity for younger workers, it could also have negative implications for educational attainment and future productivity.
In particular, a wide range of school superintendents in the Eleventh District are expressing concern about dropout rates for their junior and senior classes and the long-term impact on the workforce if these young adults don’t return to achieve their high school certificate.
Employment in Age Group 16-19 is Fully Recovered, Who Else is Winning?
I too noted the rise in teenage employment. For details, please see Hooray! Employment in Age Group 16-19 is Fully Recovered, Who Else is Winning?
Recent Retirements Throw Wrench Into Fed’s Economic Recovery Plans
The Wall Street Journal reports Recent Retirements Throw Wrench Into Fed’s Economic Recovery Plans
“This is an extraordinarily unusual time, and we really don’t have a template of any experiences of a situation like this,” said Fed Chairman Jerome Powell in a press conference Wednesday following the central bank’s June meeting. “We have to be humble about our ability to understand the data.”
The rapid rise in retirements translates to fewer people available to work—meaning the labor market could hit the full employment threshold at lower levels of employment and a lower labor-force participation rate than before the pandemic.
“It is a different economy,” Mr. Powell said. “We don’t actually know exactly what labor-force participation will be as we go forward.”
People Are Quitting Their Jobs at a Record Rate
I discussed retirements on June 13 in People Are Quitting Their Jobs at a Record Rate: What's Going On?
A reader noticed I had a data point incorrect for age group 60-64. I added a correction note referring back to this post.
Population-adjusted, the age group showing retirements is 65 and older. First, here is the raw data.
Employment Change Pre-Pandemic to May 2021
Overall employment is down 6.9 million but accounting for a rise in working-age population, employment is down 8.4 million as the following table shows.
Population and Population Adjusted Employment
Since February 2020, the overall population is up by 1.6 million but the population of those 65+ alone is up by 2.0 million. Age groups 60-64 and 65+ are the only age groups gaining population.
The second chart shows that employment in age group 65+ is down by only 915,000. However, population-adjusted employment in age group 65+ is down by 2.9 million.
On a percentage basis, age group 65+ accounts for over 34% of the population adjusted decline in employment since February 2020.
These numbers are bound to get much worse.
For example, the population of age group 60-64 is 21 million. Within 5 years they will all be 65-69 with a current employment population ratio of 33.1 down from 57.3.
Those currently 65-69 (18.2 million) will be five years older too, also with declining employment population ratios.
Although Powell is correct that we do not know were these ratios will go, he should not at all be confused by the direction.
I will discuss this further in a future post that incorporates population projections.
Original post from Mish Talk