The True Workforce Participation Rate and Employment to Workforce Ratio Signal a Growing Economy

May 2nd, 2013

by Anton Vrba

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We investigate the employment situation in respect to economic-capable persons 16 to 64 year old, from which we derive a workforce participation rate and an employment-workforce ratio that paints a picture of a growing economy showing no signs of recession. This is in contrast to the official Civilian Labor Force Participation Rate and the Civilian Employment-Population Ratio which do not project encouraging prospects for the economy.

Franz Lischka in his article US Economy: Below Stall Speed or Already Above Potential? discusses economic growth in relation to expected demographic changes, which inspired us to investigate the true employment situation based on economic-capable persons only.

Let's have a look at the civilian labor force participation rate and the employment-population ratio as published by the Bureau of Labor Statistics (BLS).

It is obvious that the civilian labor force participation rate graph looks discouraging for the U.S. economy. This graph is based on a labor force defined as the number of over 16 years old persons minus farm employees, persons in education, disabled persons, and other unknown criteria.

The civilian employment to population ratio graph below is equally depressing, but this graph is biased by an increase in the retired population due to demographics as discussed by Lischka.

Both of the above graphs depict a downturn since the peak of 2000, but is it really that bad?

Let's look at the employment situation from a different perspective and apply a demographic correction to them, i.e. we replace total population with the total economic-capable population younger than 65 years, typically people who are not eligible for Medicare and Social Security benefits.

Using the following FRED data series:

  1. USPRIV: All Employees - Total Private Industries
  2. USGOVT: All Employees - Total Government
  3. UNEMPLOY: Total Unemployed
  4. LNU00000060: Civilian Noninstitutional Population - 25 to 54 years
  5. LNU00000036: Civilian Noninstitutional Population - 20 to 24 years
  6. LNU00000020: Civilian Noninstitutional Population - 16 to 19 years

First, we estimate the economic-capable workforce:

P(16-64yr) = 0.9*D+0.7*E +0.3*F + 0.8(E+F 40 years ago, to include the population 55 to 64 years old).

For lack of better data, the fractions 0.9, 0.7, 0.3, and 0.8 were intuitively chosen to adjust for persons who are not competing on the employment market because of education, early retirement, etc.

As no data prior to 1948 is available for E and F, an estimation is used for the population numbers of the 56 to 64 year group for the period 1948 to 1988. (The 56 to 64 year group in 1988 are those who were 16 to 24 year old in 1948.) In 1988 the ratio of 56 to 64 years old to 25 to 54 years old was 17%. This ratio was linearly reduced down to 5% in 1948 to take account of the earlier retirement age in 1948. We are not interested in the exact numbers of the early years; we are interested in the information from this data during the business cycles.

Secondly, we derive the following five curves, all as a percentage of the economic workforce of 16 to 64 year old persons (top-down order in Figure 1):

  1. participation rate all: (USPRIV+USGOVT+UNEMPLOY)/P(16-64yr)
  2. employment-workforce ratio all: (USPIRV+USGOVT)/P(16-64yr)
  3. participation rate private industry: (USPRIV+UNEMPLOY)/P(16-64yr)
  4. employment-workforce ratio private industry: USPRIV/P(16-64yr)
  5. employment-workforce ratio government: USGOVT/P(16-64yr)
  6. unemployed: UNEMPLOY/P(16-64yr)

The above figure portrays a completely different picture of economic prospects than what one would gain from the two official BLS charts. By comparing the employment situation to the active workforce which is competing for employment, it clearly shows that industry is growing at a faster pace than the growth of the eligible workforce, as is indicated by the rising participation rate (red line) after the last recession. Even when the government employees (whose numbers have been decreasing during the last four years) are included, the overall workforce participation rate (brown line) is still increasing ever so slightly.

We also observe that the employment to workforce ratio (blue or green lines) was either static or falling before every recession since 1948 and never rising as it presently does, again confirmation that a recession is not near.

A final comment: It may not be the academically correct way to define an economic workforce as P(16-64yr) and derive employment ratios and participation rates against this workforce; however, in the author's opinion, the size of the retired population, i.e. the above 65's, should not be part of economic indicators.



Anton Vrba

iM imarketsignals.com

Anton Vrba is an electrical engineer. He pursued a career in R&D, manufacturing and construction project management. His interests are mathematics and physics. He is a lateral thinker and has ideas that challenge the established explanations to the workings of the universe, which he is in the process of publishing on his website.

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