Oregon Office of Economic Analysis

As Oregon’s economy has recovered from the pandemic, job growth is starting to slow. A key concept in economics is that of full employment, or the natural rate of unemployment, sometimes referred to as NAIRU or u* (pronounced u star). Basically it’s the highest employment level an economy can have without generating higher inflation and when nearly everyone who wants a job, has a job. I know what you’re thinking. With today’s high inflation that must mean we are beyond full employment. From a demographic and employment view I don’t think that’s correct, but I do think we have seen more wage-price persistence that many economists expected. A common view today, held by our office as well, is that as the labor market cools just a bit, it will lessen the pressure on the market and wage growth will slow back to something more consistent with the Fed’s inflation target. Tomorrow we get the 2023q1 employment cost index reading for the nation which is the best measure of wage growth. It started to slow at the end of last year, and we will see if that continued or not.

With that preamble out of the way, a key number I’ve been watching closely this year is Oregon’s labor force participation rate. Last month Oregon’s LFPR stood at 62.7%. At first blush that can seem low. But it’s important to remember that the standard LFPR is calculated based on the entire population 16 years and older. That means our shifting demographics, where the large Baby Boomer generation is retiring, mathematically pulls down the labor force participation rate even if younger Oregonians seek work at historically normal rates. As such, March’s 62.7% labor force participation rate in Oregon is almost exactly what one would expect in a full employment economy given today’s demographics.

Now, that demographically-adjusted full employment participation estimate is anchored to what the labor market looked like in 2000, the last time we know the U.S. economy was truly at full employment, if not a bit beyond it. This is common technique to use given the lackluster and largely incomplete economic recoveries this millennium. As seen in the chart, the common state of the US economy in recent decades has been underperforming. Of course this is all old news. But it raises an important question. Should we still be thinking about 2000 as a proxy for what we think the labor market should look like?

Given we know today’s labor market is very strong as well, does it make sense to update our views and think about now as the new normal, or the new full employment? Here’s what I mean. Let’s take a look at the labor force participation rate by age today and compare it to 2000. I think this chart is informative.

First for most prime working-age cohorts today’s LFPR is the same as back in 2000, the vast majority of 30-54 years today work just as much as their counterparts did during the tech boom. What’s different however is lower participation rates today among teenagers and 20-somethings, but a corresponding increase among 60- and 70-somethings.

The question is how should we think about this? We have noted before the increase in employment among 60- and 70-somethings. I think that is generally here to stay. It’s in part due to more office-based work and less manual labor allowing workers to physically work longer if they so choose, and in part financial where some of us have to work longer because we do not have enough retirement savings. On the other end, much of the decline in participation among younger Oregonians (and Americans) is due to increased schooling. And increased schooling may depress participation and the labor force today but *should* increase wages and hopefully productivity in the future. But the increased schooling was a 2000s and 2010s story and is not a pandemic story when we know higher ed enrollments are down. Nationally, participation rates among teenagers is rising slightly, but has a long way to go to get back to 1990s readings. And 20-24 year old participation is better described as flat, although ticking up in recent months.

These differences can matter when thinking about the outlook and what Oregon’s potential labor force, and potential economic growth could look like. Now, if we take the 2000 age profile of the labor force, and the 2022 age profile of the labor force and compare them, they look pretty similar in aggregate. See the two solid gray lines in the chart below. The 2022 profile is a bit stronger given current demographics where the higher participation rates among 60-somethings matters more given the Baby Boomers and the lower participation rates among younger Oregonians matters less given the smaller Gen Z population.

But it’s really that top, dashed line that I am curious about. All that does is take the maximum LFPR by age from either 2000 or 2022 and maps that to our demographic forecast in the decade ahead. What it shows is if Oregon were to maintain the higher participation rates among older workers and a return to higher rates from younger workers at the same time, Oregon’s potential labor force would be at least 100,000 higher. That’s a huge number, especially when we have more job openings today than unemployed Oregonians.

Now, I don’t know that it is a reasonable assumption to bank on suddenly reversing 20 year trends (lower participation among younger workers). But thinking through exercises like this is important when assessing where we think the economy is going or could potentially go in the years ahead. Remember, economic growth is about how many workers you have and how productive each worker is. What this shows is we need to add younger workers to the list of potential pockets of labor that businesses need to tap into more if they are looking to hire and expand, or even just replace retirements. This would be in addition to the Latent Labor Force which is about the possibility of reducing historical disparities when it comes to differences based on sex, educational attainment, and race and ethnicity.

Finally, this baseline work is also important when thinking about alternative scenarios of the future could look like. For instance, if population growth and migration does not rebound as expected, it means local firms will need to tap into the existing pool of labor to a greater degree to hire. And if we look across the nation, some of the places with higher employment and participation rates on a demographically adjusted basis are places like the Midwest which hasn’t seen the population and migration trends that the West and South have in recent generations. Our office will have more to say on these potential possibilities at a future date.