Disappointing Labor Markets in the Nation and in Key States

Earlier this year the CBO Budget and Economic Outlook (p 36-37) pointed out that much of recent decline in the national unemployment rate has been due to an unusually large decline in the labor force participation rate. Of course, people who drop out of the labor force—even if they give up looking for a job because they could not find one—are not counted as unemployed. Were it not for the unusual labor force decline (that is, the decline beyond what is due to the aging of the baby boomers and the downturn in the business cycle), the unemployment rate would be “about 1¼ percentage points higher than the actual rate” according to the CBO. This means that the current 7.8 percent is actually 9.1 percent.

Of course, the same phenomenon is occurring at the state level, and affects voters’ views in the battleground states about the effectiveness or ineffectiveness of economic policy. It is difficult to estimate aging and business cycle effects on the labor force at the state level, but an examination of employment can give a pretty clear picture of what is going on.

Consider Iowa for example. Many have noted that the unemployment rate is lower in Iowa than the national average, but that has been the case for decades. What is less well known is that employment has recently been declining in Iowa. In fact, employment is now lower in Iowa than at the start of the recent recovery, meaning that in Iowa the recovery is even weaker than the United States as a whole.

The following chart tells the story. It shows that employment is lower than at the start of the recession, or than at the start of the Obama administration, or than at end of the recession. It also shows a worrisome sharp decline in the past few months. Since May of this year, 26,000 jobs have been lost in Iowa according to the household survey reported by the Bureau of Labor Statistics. The pace of decline is sharper than in the recession.

The reason that unemployment has declined in Iowa even though employment fell is, of course, due to the decline in the labor force. In fact, the sharp decline in employment since May was matched by a 25,000 person decline in the labor force. This sharp decline could not be due to the more gradual aging of the population nor to the business cycle, unless there is double dip in Iowa.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

Visit: John Taylor's Page, Blog

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