Adjusted EPOP as an Indicator of Labor Market Strength

Abstract

As a measure of labor market strength, the raw Employment-to-Population ratio (EPOP) confounds employment outcomes with labor supply behavior. Movement in the EPOP depends on the relative movements of the employment rate (one minus the unemployment rate) and the labor force participation rate. This paper proposes an adjustment to the calculation of the EPOP, using individual micro data to account for both individual characteristics and the probability of labor force participation, which can be used to assess the strength of the labor market. The adjusted EPOP confirms what we already knew—that the stagnation of the EPOP since the end of the Great Recession is the result of continued declines in the labor force participation rate. Stripping the EPOP of confounding changes in labor supply we uncover a story that is more consistent with movements in the unemployment rate—the adjusted EPOP has regained its prerecession level of nearly 63 percent. Youth have regained even more, and those 25 to 54 regained 71 percent of their loss over the sample period. Of course, there remains the issue of declining labor force participation, which is a legitimate but different concern than whether the labor market is providing enough jobs.