Posted by: Josh Lehner | July 26, 2011

Big Picture, Long Run Forecasting

One of the items our office has been asked to look into is longer term forecasting. With Governor Kitzhaber’s emphasis on 10 year budgeting and former Governor Kulongoski’s Reset Cabinet report focusing on long-run budget issues, this is of significant importance. Previously, our office had forecasted approximately 6 or 7 years into the future, however beginning with our May 2011 forecast, we have moved to 10 year forecasts for economic variables and revenue projections.

What follows below are a series of graphs designed to illustrate the demographic and employment changes facing Oregon over the coming decade. This is not an Oregon-specific or Oregon-only issue as the nation (and most of the Western world) face the same issues. First, Oregon’s population growth is expected to slow relative to history.

Coupling this with an aging population, you get a decline in the share of the population that is of prime working age (defined here as 25-64 years old). Note that the total number will continue to increase, however slower than total population growth.

However, Oregon tends to have a higher labor force participation rate than the nation and surrounding states. The combination of strong population growth and higher labor force participation rates are a large portion of the reason Oregon experiences stronger overall employment growth than the national average.

If the population is aging, resulting in a slower increase in the working age population, coupled with a downward shift in the labor force participation rate, what is a reasonable employment growth rate over the next decade? That is the question we are trying to answer and will be discussing more with the Governor’s Council of Economic Advisors at our next quarterly meeting. The graph below is our office’s previous forecast.

The graph illustrates the trend, or steady-state if you will, growth during previous expansions. The red lines are designed to provide the average growth for each segment/expansion they cover. During the 1960s and 70s Oregon experienced strong employment growth (regularly in the 4-6 percent range), however the state also had very strong population growth (see first graph) and an increase in the labor force participation rate due to the aging of the Baby Boomers into their prime working years but also due to increased inclusion of women in the work force. In the 1980s Oregon saw decent population growth and solid increases in the labor force participation, resulting in employment growth of nearly 4 percent. In the 1990s, Oregon had strong population growth but no labor force participation increases, with employment grow averaging about 3 percent. In the 2000s, Oregon had mediocre population growth (still stronger than the nation’s), a declining labor force participation rate and employment growth averaged nearly 2.5 percent.

What does all of this mean moving forward? Our forecast includes mediocre population gains and no real rebound in the labor force participation rate. We still foresee Oregon growing quicker than the nation (our employment beta), however peak growth in the near term will be approximately equal to what the state experienced last business cycle (however, hopefully without an asset bubble). The main difference is over the medium to longer term, where the employment growth rate trends downward. This is where the effect of an aging work force begins to bite into net employment growth.


Responses

  1. Population growth or decline can drive employment growth or decline, and the reverse is also true. I think the difficulty is deciding what factors are likely to shift population growth and, separately, employment growth away from their historical trends. For example, if Oregon became more of a retirement destination state for some reason, that could boost employment, albeit mostly in relatively low-income service jobs along with some health care jobs. Age group labor force participation rates may rise in the future as older people have to continue working to make ends meet, rather than retiring; this would boost employment but would not be seen as good job growth.

    • Thanks Art. Absolutely agree that the causation runs both ways. If you look back historically, sometimes population growth leads employment growth and sometimes employment growth leads population growth, depending upon the exact time period in question. As for labor force participation among older individuals, it is expected that their participation will be higher than previous generations – a function of both the type of work they do (workers today are more white-collar than blue-collar) and a necessity given the asset bubbles and recessions over the past decade, to cite two reasons. The Employment Department had a great article on this a couple months back http://www.qualityinfo.org/olmisj/ArticleReader?itemid=00007585

  2. […] employment growth over the past 50 years plus our latest forecast. This is a partial update on a post from last summer and illustrates both the volatility in employment and also the big picture changes that have taken […]

  3. […] https://oregoneconomicanalysis.wordpress.com/2011/07/26/big-picture-long-run-forecasting/ Share this:TwitterFacebookLike this:LikeBe the first to like this. This entry was posted in Uncategorized. Bookmark the permalink. ← Hello world! […]

  4. […] states? In the West, yes, but not Oregon.” Scary because we’re looking at a coming decade of slower economic growth, predominantly due to the aging Baby Boomers. The antidote for such an outlook is young, working […]

  5. […] growth coming out a financial crisis is the norm and the demographic trends moving forward will weigh considerably on growth rates as the Baby Boomers retire en masse. Our office is optimistic about the outlook, we just believe […]

  6. […] forecasts. We are expecting growth to be slower this decade than in past expansions. However these bigger picture, longer-run trends do not rule out a year or three of relatively robust growth in the near term. 2014 was actually a […]

  7. […] forecasts. We are expecting growth to be slower this decade than in past expansions. However these bigger picture, longer-run trends do not rule out a year or three of relatively robust growth in the near term. 2014 was actually a […]


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