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Solving the data puzzle at the center of monetary policy

Thursday, February 23, 2017 15:28
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There has been much hand wringing by economists over the falling labor force participation rate (LFPR). As the chart below shows, the prime age LFPR, which is not affected by the age demographic effect of retiring Baby Boomers, have not recovered to levels before the Great Recession.


The lack of recovery in LFPR has caused great consternation over at the Federal Reserve. These readings suggest that there is still considerable slack in the labor market, despite the sub 5% unemployment rate.

A number of explanations have been advanced for this phenomena, such as jobless Millennials spending all their time playing video games in their parents’ basement instead of looking for a job (via Nicholas Eberstadt of the American Enterprise Institute).


Another possible explanation is the growth of disability as a shield against unemployment payments run out. As the Great Recession hit, disabled workers became discouraged and chose to rely on their disability payments instead of trying to find another job.


There may be another very simple alternative explanation for the collapse in LFPR. The answer is so simple, it’s criminal that anyone missed it.

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