macroblog

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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

Authors for macroblog are Dave Altig and other Atlanta Fed economists.


May 04, 2016


What's behind the Recent Uptick in Labor Force Participation?

The labor force participation rate had been generally declining since around 2007. However, that trend has partially reversed in recent months. As noted in the minutes of the March meeting of the Federal Open Market Committee, this rise was interpreted as further strengthening of the labor market. But will the increase persist?

As shown in a previous macroblog post, the dominant contributor to the decline in participation during the last several years has been the aging of the population. To see what's behind the increase in participation during the last few months, the following chart breaks the participation rate change between the first quarters of 2015 and 2016 into a part that is the result of shifts in the age distribution (holding behavior within age groups fixed), and the parts that are the result of changes in behavior (holding the age distribution fixed).

During the last year, the negative effect on participation attributable to an aging population (0.22 percentage points) has been offset by a 0.23 percentage point decline in the share of people who want a job but are not counted as unemployed (including people who are marginally attached). This decline is an encouraging sign, and consistent with a tightening labor market.

How much more can the want-a-job category improve? We don't really know. But that category's share of the population is currently about 0.3 percentage points above the prerecession trough of 2.0 percent. So at the current pace we would be at prerecession levels in about a year.

Despite the recent uptick, projections over the next decade or so have the labor force participation rate moving lower, chiefly because of an aging population. But how much farther participation actually declines will also depend on the evolution of various behavioral factors. The employment report for April will be released this Friday by the U.S. Bureau of Labor Statistics, and it will be interesting to see whether the number of people on the margin of the labor force continues to shrink.

May 4, 2016 in Employment, Labor Markets, Unemployment | Permalink | Comments (0)

April 29, 2016


Is the Number of Stay-at-Home Dads Going Up or Down?

A recent Wall Street Journal post observed that most of the recession's "stay-at-home dads" are going back to work. Specifically, data from the U.S. Labor Department shows that the share of married men with children under 18 who are not employed (but their spouse is) rose during the recession and has since given back much of that increase, as the Journal's chart below indicates.

Rise and Decline of the Stay-at-Home Dad

Of course, being a stay-at-home dad in the sense defined in the previous chart (that is, not employed) can be either involuntary because of unemployment, or it can be the result of a voluntary decision to not be in the workforce. Most of the variation in the previous chart is cyclical, suggesting that it is related to the rise and fall in unemployment. But it also looks like the share of stay-at-home dads is higher now than it was a decade or so ago. So perhaps there is also an increasing trend in the propensity to voluntarily be a stay-at-home dad.

To explore this possibility, the next chart shows the annual average share of married men ages 25–54 who have children and who say the main reason they do not currently want a job is because of family or household responsibilities. (This reason doesn't necessarily imply that they are looking after children, but it is likely to be the leading reason.) The fraction is very small—about 1.3 percent in 2015, or 285,000 men—but the share has more than doubled during the last 15 years and would account for about half of the elevated level of the stay-at-home rate in 2015 relative to 2000.

Share of 25- to 54-year-old married men with children who don't currently want a job because of family or household responsibilities

So although large numbers of unemployed stay-at-home dads have been going back to work, it also appears that there's a small but growing group of men who are choosing to take on household and family responsibilities instead.

April 29, 2016 in Employment, Labor Markets, Unemployment | Permalink | Comments (1)

April 15, 2016


Labor Force Participation: Aging Is Only Half of the Story

The labor force participation rate (LFPR) is an important ingredient in projecting employment growth and the unemployment rate. However, predicting the LFPR has proven difficult. For example, in 2011 the Congressional Budget Office (CBO) projected that the LFPR in 2015 would be about 64.3 percent. In reality, the LFPR turned out to be 62.6 percent. Based on the CBO projection, the economy would have needed to create about 4 million more jobs to reach the 2015 unemployment rate of 5.3 percent.

Why is the LFPR so hard to predict? Leaving aside the challenge of projecting the size of the population, movements in LFPR primarily reflect shifts in the age distribution of the population as well as a number of behavioral factors. Although the aging trends are largely baked in, the behavioral factors vary over time. According to our estimates, about half of the 3.4 percentage-point decline in the LFPR between 2007 and 2015 is the result of the aging of the population, while behavioral factors account for the rest.

The complication is that the specific behaviors can change. The following chart shows a decomposition of the change in LFPR from 2007 to 2011 and from 2011 to 2015. Though the aging of the population contributed about the same amount to the decline in LFPR in both periods, the contributions from other factors have varied a lot. (We delve into the changes in the factors following the chart.)

Aging: The single largest factor contributing to the decline in the overall LFPR has been the rising share of older Americans in the population. In 2007, about one in five Americans were over 60 years old. In 2015, almost one in four were over 60. Moreover, this demographic force will continue to suppress the overall LFPR as the share of older Americans increases further in coming years. (For an in-depth discussion of the economic implications of an aging population—including changes in the labor market—please read the Atlanta Fed's 2015 annual report.)

Later retirement: One countervailing factor to an aging population has been the rising LFPR of older individuals. The retirement rate of those over 60 declined between 2007 and 2011 by a similar amount as it had before the recession. However, the trend toward later retirement has slowed considerably in recent years. The reason for this slowing is a puzzle and has important implications for the future course of overall LFPR.

Schooling among the young: The enrollment in educational programs by American youth has been generally rising over several decades, and this trend has put downward pressure on the overall LFPR. During the 2007–11 period, the share of 16- to 24-year-olds who do not want a job because they were in school or college accelerated relative to the prerecession trend. However, enrollment rates have since flattened out. The slowing may reflect enrollment rates catching up to the longer-term trend or may be a result of changes in the opportunity cost of education.

Not in the labor force but want a job: The share of the population saying they want a job but are not classified as unemployed by the U.S. Bureau of Labor Statistics definition is countercyclical—it tends to go up during bad times and down during good times. The relative size of this group increased between 2007 and 2011 and has since retraced about half of that increase as the economy has strengthened. We expect that this category will continue to shrink some more as the economy continues to expand.

Health: The share of individuals who do not want a job because they were too ill or disabled to work has increased over time. The relative size of this group increased between 2007 and 2011. Since 2011, the rate of increase has slowed, and it actually declined in 2015. It is not clear what drove the larger increase during the 2007–11 period, but there is some literature linking weak labor market conditions to poor health outcomes.

Prime-age reasons for not wanting a job (other than health): During the recession, the share of prime-age (ages 25 to 54) women not wanting a job because of household or family responsibilities decreased. One explanation is that some women entered the labor force to help make ends meet. At the same time, there was an offsetting effect from a rise in educational enrollment. Since the recession, nonparticipation because of household or family responsibilities has returned to near prerecession levels, and educational enrollment has leveled off.  

To summarize, we find that relative to the 2007–11 period there has been a:

  • flattening in the rate of retirement by older individuals,
  • flattening in the rate of educational program enrollment by younger individuals,
  • declining share of the population saying they want a job but not officially counted as unemployed,
  • smaller drag from nonparticipation because of health, and
  • larger drag for reasons other than health among prime-age individuals.

Where will LFPR be by the end of 2016? What about five years from now?
During the first three months of 2016, there has been an increase in the overall LFPR. This was largely the result of a decline in the share of prime-age people citing health reasons for nonparticipation, with some contribution from a decline in the share who want a job but are not "unemployed."

Though these boosts to participation may offset the effect of an aging population in the short term, most forecasts have the LFPR declining over the next several years. How much participation will actually decline depends on the answers to several difficult questions, such as: Will older individuals push retirement out even farther? Will school enrollment rates rise more rapidly again? Will the health status of the population improve? The difficulty of answering these questions helps explain why making accurate labor force projections is challenging.

 

April 15, 2016 in Labor Markets | Permalink | Comments (3)

April 13, 2016


Putting the MetLife Decision into an Economic Context

In a recently released decision, a U.S. district court has ruled that the Financial Stability Oversight Council's (FSOC's) decision to designate MetLife as a potential threat to financial stability was "arbitrary and capricious" and rescinded that designation. This decision raises many questions, among them:

  • Why did MetLife sue to end its status as a too-big-to-fail (TBTF) firm?
  • How will this decision affect the Federal Reserve's regulation of nonbank financial firms?
  • What else can be done to reduce the risk of crisis arising from nonbank financial firms?

Why does MetLife want to end its TBTF status?
An often-expressed concern is that market participants will consider FSOC-designated firms too big to fail, and investors will accord these firms lower risk premiums  (see, for example, Peter J. Wallison). The result is that FSOC-designated firms will gain a competitive advantage. If so, why did MetLife sue to have the designation rescinded? And why did the announcement of the court's determination result in an immediate 5 percent increase in the MetLife's stock price?

One possible explanation is that the FSOC's designation guarantees the firm will be subject to higher regulatory costs, but it only marginally changes the likelihood it would receive a government bailout. The Dodd-Frank Act (DFA) requires that FSOC-designated firms be subject to consolidated prudential supervision by the Federal Reserve using standards that are more stringent than the requirements for other nonbank financial firms.

Moreover, the argument that such designation automatically conveys a competitive advantage has at least two weaknesses. First, although Title II of the DFA authorizes the Federal Deposit Insurance Corporation (FDIC) to resolve a failing nonbank firm in certain circumstances, DFA does not provide FDIC insurance for any of the nonbank firm's liabilities, nor does it provide the FDIC with funds to undertake a bailout. The FDIC is supposed to recover its costs from the failed firm's assets. Admittedly, DFA does allow for the possibility that the FDIC would need to assess other designated firms for part of the cost of a resolution. However, MetLife could as easily have been assessed to pay for another firm as it could have been the beneficiary of assessments on other systemically important firms.

A second potential weakness in the competitive advantage argument is that the U.S. Treasury Secretary decides to invoke FDIC resolution only after receiving a recommendation from the Federal Reserve Board and one other federal financial regulatory agency (depending upon the type of failing firm). Invocation of resolution is not automatic. Moreover, a part of any decision authorizing FDIC resolution are findings that at the time of authorization:

  • the firm is in default or in danger of default,
  • resolution under other applicable law (bankruptcy statutes) would have "serious adverse consequences" on financial stability, and
  • those adverse effects could be avoided or mitigated by FDIC resolution.

Although it would seem logical that FSOC-designated firms are more likely to satisfy these criteria than other financial firms, the Title II criteria for FDIC resolution are the same for both types of firms.

How does this affect the Fed's regulation of nonbank firms?
Secretary of the Treasury Jack Lew has indicated his strong disagreement with the district court's decision, and the U.S. Treasury has said it will appeal. Suppose, however, that FSOC designation ultimately does become far more difficult. How significantly would that affect the Federal Reserve's regulatory power over nonbank financial firms?

Although the obvious answer would be that it would greatly reduce the Fed's regulatory power, recent experience casts some doubt on this view. Nonbank financial firms appear to regard FSOC designation as imposing costly burdens that substantially exceed any benefits they receive. Indeed, GE Capital viewed the costs as so significant that it had been selling large parts of its operations and recently petitioned the FSOC to rescind its designation. Unless systemically important activities are a core part of the firm's business model, nonbank financial firms may decide to avoid undertaking activities that would risk FSOC designation.

Thus, a plausible set of future scenarios is that the Federal Reserve would be supervising few, if any, nonbank financial firms regardless of the result of the MetLife case. Rather, ultimate resolution of the case may have more of an impact on whether large nonbank financial firms conduct systemically important activities (if designation becomes much harder) or the activities are conducted by some combination of smaller nonbank financial firms and by banks that are already subject to Fed regulation (if the ruling does not prevent future designations).

Lessons learned?
Regardless of how the courts and the FSOC respond to this recent judicial decision, the financial crisis should have taught us valuable lessons about the importance of the nonbank financial sector to financial stability. However, those lessons should go beyond merely the need to impose prudential supervision on any firms that are systemically important.

The cause of the financial crisis was not the failure of one or two large nonbank financial firms. Rather, the cause was that almost the entire financial system stood on the brink of collapse because almost all the major participants were heavily exposed to the weak credit standards that were pervasive in the residential real estate business. Yet if the real problem was the risk of multiple failures as a result of correlated exposures to a single large market, perhaps we ought to invest more effort in evaluating the riskiness of markets that could have systemic consequences.

In an article in Notes from the Vault and other forums, I have called for systematic end-to-end reviews of major financial markets starting with the origination of the risks and ending with the ultimate holder(s) of the risks. This analysis would involve both quantitative analysis of risk measures and qualitative analysis of the safeguards designed to reduce risk.

The primary goal would be to identify and try to correct weaknesses in the markets. A secondary goal would be to give the authorities a better sense of where problems are likely to arise if a market does encounter problems.


April 13, 2016 in Banking, Regulation | Permalink | Comments (1)

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