The April Employment Report (050407)
Precursors:
- ADP’s Employment Report — +64,000 in the private sector
- From Reuters’ interviews of economists — +100,000
Actuals: (BLS Link)
- Unemployment — 4.5%, up 0.1%
- Jobs added in April — +88,000
- Revisions to previous months — March, -3,000 (180,000 to 177,000); February, -23,000 (from 113,000 to 90,000)
Quick Take: — As noted earlier this morning, the relatively tepid opening number for April (which will be subject to two revisions, most of which have been upward in the past 12-plus months) isn’t enough to put a damper on the long string of good reports that have come out during this past week.
As a matter of fact, labor force growth does not affect real economic growth by drives inflation and unemployment with pags of 2.5 and 5.5 years.
If you look at the labor force increase between 1965 and 1985 (participation rate increase from 60% t0 68% + annual population growth of 1%) due to a strong growth in women’s particiapation rate, you find that there was NO significant increase in real GDP per capita during this period. At the same time, exactly this years are characterized by elevated inflation.
May be labor force figures are not so important for economic development?
You can also check this statement econometrically and find correlation between real annual economic growth (GDP per capita) and labor force growth rate. (Effectively- no correlation).
Inflation is driven by labor force change with 2.5 year lag – see Figures 8 and 9 from my paper
http://ideas.repec.org/p/pra/mprapa/2735.html
They are very convincing.
Comment by Ivan Kitov — May 6, 2007 @ 6:16 am
#1, I’m not convinced. Labor force participation as a % flattened after 9/11, but there was still some inflation during the post-9/11 period, and there has been during the lag you suggest.
Comment by TBlumer — May 6, 2007 @ 9:06 am
There are two statements – on real economic growth and inflation. Do I understand correct?
1. You agree that real economic growth, as represented by GDP per capita, does not depend on labor force increase and
2. You are not convinced that inflation is a linear lagged function of labor force change rate.
Then.
What kind of evidence will you trust?
I have only tools borrowed from econometrics and statistics. As a physicist, I trust only those predictions, which collapse to measurements, considering corresponding uncertainty in measurements.
Therefore, for me, goodness-of-fit of 0.92, root mean square forecasting error of 0.8% at two-year horizon, and the existence of a conitegrating relation between inflation and labor force change rate, as the Johansen test shows, seem reliable and convincing.
Comment by Ivan Kitov — May 6, 2007 @ 10:54 am
#3, I think that inflation is a phenomenon of monetary policy, and that any correlation to labor force participation rates (or is it number of bodies?) is coincidence and not proof of a correlation
Comment by TBlumer — May 6, 2007 @ 11:34 am
If you look through the papers written by Stock and Watson on the potential variables driving inflation you will find that there is no one from several hundred, studied by them (aggregated and disaggregated), which is correlated with inflation during the period. These parameters, however, are used in the models applied by central banks.
the change rate of labor force level (the number of bodies in labor = employed + unemployed) has a correlation larger even than that provided by autocorrelation at the same time shift and leads inflation by two years. (During the last 20 years the best inflation prediction is based on the naive approach – tomorrow as today, mathematically it is random walk, which outperforms almost every other inflation model at one year horizon.)
No change in monetary policy in the USA between 1960 and 2005 has resulted in any change in correlation between labor force and inflation. If this correlation exists 45 years why should it disappear now on in near future?
In France, however, such the effect of wrong monetary policy has been really observed since 1995-2000.
Comment by Ivan Kitov — May 6, 2007 @ 12:25 pm