Question

In discussing the labor market during the recovery from the \(2007-\) 2009 recession, Federal Reserve Chair Janet Yellen noted that "the employment-to- population ratio has increased far less over the past several years than the unemployment rate alone would indicate, based on past experience." a. During an economic expansion, why would we normally expect the employment- population ratio to increase as the unemployment rate falls? b. Why didn't the employment-population ratio increase as much as might have been expected during the recovery from the \(2007-2009\) recession?

Short answer

a. During an economic expansion, increased job opportunities lead to a higher employment-population ratio and a lower unemployment rate. b. The employment-population ratio did not increase as much as expected during the recovery from the 2007–2009 recession due to factors like heavy job losses, slow job creation rate, and increased retirement among the baby boomers.

Step-by-step solution

Understanding Employment-Population Ratio and Unemployment Rate

Before proceeding, make sure to understand that employment-population ratio is the proportion of the working-age population (typically ages 15-64) that is employed. Unemployment rate, on the other hand, is the percentage of the workforce (those working or actively looking for work) who are without jobs. During an economic expansion, ordinarily, there are more job opportunities, which leads to a higher employment-population ratio and a lower unemployment rate.

Expected Change in Employment-Population Ratio During Economic Expansion

During an economic expansion, businesses typically grow and hire more workers to meet increased demand for their products or services. As more people find jobs and the employment-population ratio increases, the unemployment rate usually falls. This is because the size of the working-age population remains relatively constant, so when more people are employed, fewer people are unemployed.

Understanding the 2007-2009 Recession's impact on Employment-Population Ratio

The recession of 2007-2009 was marked by heavy job losses. Even when the economy began to recover, many people who lost jobs during the recession struggled to find new ones. The slow rate of job creation meant that the employment-population ratio didn’t increase as much as the fall in the unemployment rate might have indicated. Other factors like increased retirement rate among the baby boomers might have further skewed the ratio.

Key concepts

Employment-Population Ratio

The employment-population ratio provides insight into the health of the labor market by showing the proportion of the working-age population that is employed. It takes into account everyone who is part of this demographic, not just those actively seeking work. This ratio can reflect changes in employment opportunities as well as demographic shifts.

When more of the working-age population finds jobs, the employment-population ratio rises. This often correlates with economic growth phases, where businesses expand and hire more employees. Conversely, when job availability dwindles or when people step out of the workforce, either due to discouragement or retirement, this ratio may stagnate or decline.

Overall, a growing employment-population ratio is a positive indicator of economic health, but it also needs to be analyzed in context with other metrics like the unemployment rate and broader economic conditions for a full picture.

Unemployment Rate

The unemployment rate is a widely used indicator of economic performance. It represents the percentage of the labor force that is actively seeking employment but remains jobless. Unlike the employment-population ratio, it excludes people who've stopped looking for work for various reasons.

Typically, during economic expansions, the unemployment rate falls. This is because the demand for labor increases as companies ramp up production to meet consumer demand. More job openings lead to more hires, reducing the unemployment rate. However, if the labor force grows rapidly or if people re-enter the labor market, the unemployment rate might not fall as expected.

Interestingly, shifts in the unemployment rate don't always align perfectly with movements in the employment-population ratio. Factors such as labor force participation rate changes can influence these discrepancies.

Economic Expansion

Economic expansion refers to a phase in the business cycle where there's increased economic activity across various sectors. This period is marked by rising consumer demand, which prompts businesses to invest in more labor, capital, and resources to meet growing needs.

During expansions, several positive outcomes generally follow:

• Higher employment levels as companies hire to support growth.
• Increased wages owing to higher demand for workers.
• Improved standards of living due to higher income and consumption.

Yet, this process isn't always smooth. Sometimes, despite general economic growth, certain segments may lag in job creation due to structural or external factors, impacting measures like the employment-population ratio.

2007-2009 Recession

The 2007-2009 recession was a severe global economic downturn that had lasting impacts on labor markets. Triggered by the housing market collapse and financial crises, it led to widespread job losses and bankruptcies. As economies began to recover, the labor market responded slowly.

Several reasons contributed to this sluggish recovery, particularly in the employment-population ratio:

• High job loss during the recession left many unemployed for extended periods, causing skills atrophy.
• Increased retirements, especially from baby boomers exiting the workforce.
• Structural changes in industries, leading to mismatches in available jobs and skills of job seekers.

These factors meant that even as the unemployment rate fell, indicating a decrease in the number of job seekers who couldn't find work, the overall proportion of people employed didn't rise as expected. This divergence highlights the complex dynamics of labor markets in the wake of significant economic disruptions.