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International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper on the United States of America examines the recent US labor force penetration rate (LFPR) dynamics. LFPR dynamics can be driven by structural factors and cyclical ones related to job prospects. With participation rates for older workers lower than for prime age workers, demographic models suggest that aging of the baby boom generation explains about 50 percent of the near 3p.p. LFPR decline during 2007–2013. State-level panel regression analysis is used to tie down the cyclical effect, which is estimated to account for about 30–40 percent of the decline. Significant remaining slack in the labor market points to an important role for macroeconomic and labor supply policies. This suggests a still important role for stimulative macroeconomic policies to help reach full employment. Macroeconomic policy should remain accommodative for a while given sizeable labor market slack. This slack goes beyond that signaled by the unemployment rate and takes account of the LFPR being below trend and many employees working part time ‘involuntarily’.
Mr. Ravi Balakrishnan, Mai Dao, Mr. Juan Sole, and Jeremy Zook
The U.S. labor force participation rate (LFPR) fell dramatically following the Great Recession and has yet to start recovering. A key question is how much of the post-2007 decline is reversible, something which is central to the policy debate. The key finding of this paper is that while around ¼–? of the post-2007 decline is reversible, the LFPR will continue to decline given population aging. This paper’s measure of the “employment gap” also suggests that labor market slack remains and will only decline gradually, pointing to a still important role for stimulative macro-economic policies to help reach full employment. In addition, given the continued downward pressure on the LFPR, labor supply measures will be an essential component of the strategy to boost potential growth. Finally, stimulative macroeconomic and labor supply policies should also help reduce the scope for further hysteresis effects to develop (e.g., loss of skills, discouragement).
International Monetary Fund. Western Hemisphere Dept.

question is how much of the post-2007 decline is reversible . LFPR dynamics can be driven by structural factors (e.g. population aging, increased college enrollment as education becomes more accessible, or later retirement due to better health) and cyclical ones related to job prospects. And forecasting is complicated by the fact that some structural factors could be reversible, (e.g. if the trend of increasing college enrollment reversed because the cost of college education for the marginal student became too high relative to the return), while part of the LFPR decline

Mr. Ravi Balakrishnan, Mai Dao, Mr. Juan Sole, and Jeremy Zook

dynamics can be driven by structural factors (e.g. population aging, increased college enrollment as education becomes more accessible, or later retirement due to better health) and cyclical ones related to job prospects. And forecasting is complicated by the fact that some structural factors could be reversible, (e.g. if the trend of increasing college enrollment reversed because the cost of college education for the marginal student became too high relative to the return), while part of the LFPR decline associated with cyclical factors could become irreversible (e

International Monetary Fund. Asia and Pacific Dept

) . LFPR declined during the 1997, 2001, and 2008 recessions. However, considering structural changes such as the age composition of the population and the trend increase in female LFPR are important for its behavior over the cycle. Figure 6 (first and second charts) shows that aging of the work force has indeed put downward pressure on the LFPR for both male and female workers, contributing to a decline of close to 3 percentage points since 2007. 7 The male LFPR has declined more than explained by demographics alone, while the opposite is true for the female LFPR

International Monetary Fund. Asia and Pacific Dept

on fertility, mortality, and net migration). ABS data show working age population growth declining gradually from 1.7 to 1.6 percent over the medium term. LFPR in Australia has declined in recent years, as mining investment related activity has unwound. Over the medium term aging pressures are expected to gradually depress LFPR. Our assumptions on LFPR are derived from cohort-wise regression estimates of LFPR trends by gender and age which yields a forecast of LFPR declining from 65.1 to 64.7 percent over the projection period. 3 Equilibrium unemployment

Christopher J. Erceg and Mr. Andrew Levin

imply that the LFPR might well exhibit a much larger cyclical response under circumstances in which a deep recession was followed by a very slow recovery and hence a protracted period of relatively high unemployment. 2.2. Labor Force Participation Since the Great Recession As we have already noted above in discussing Figure 1 , the LFPR declined by about 2½ percentage points over the five-year period ending in 2013:Q1. Thus, the crucial task is to gauge the extent to which that decline reflects cyclical vs. demographic factors. To address this issue, we first

International Monetary Fund

participation rate of older men (LFPR) was around 80 percent in both advanced and emerging economies. 39 This fell sharply until 2000, to about 40 percent in the advanced and 50 percent in the emerging. Since then, the rate has stabilized in emerging and increased in advanced ( Appendix Figure 4 ). There is some variation across countries. Only Iceland and Japan have managed to maintain LFPR above 70 percent over time. In Australia, Canada, Greece, Ireland, Sweden, the United Kingdom and the United States, the LFPR declined from above 80 percent to about 50 percent. In some

International Monetary Fund. Western Hemisphere Dept.

-time high at 67.3 percent in 2000) and subsequently entered a secular decline (following the 2001 recession). This downward movement accelerated following the global financial crisis. Labor Force Participation Rate (percent) Sources: Bureau of Labor Statistics, Haver Analytics; IMF staff estimates. LFPR dynamics are a complex combination of both structural factors (population aging or delayed retirement) and cyclical factors (largely related to the availability of jobs). Staff’s demographic models suggest that aging explains around 50 percent of the LFPR

International Monetary Fund. Asia and Pacific Dept
This Selected Issues paper analyzes the housing prices in Australia. Housing prices in Australia have increased strongly over the past two decades, including by comparison internationally. Thus housing prices are often argued to be overvalued. Many counter-arguments have been put forward for why such measures are flawed. This paper argues that housing prices are moderately stronger than consistent with current economic fundamentals, but less than a comparison to historical or international averages would suggest. International comparisons of price-to-income ratios suggest that Australia is broadly in line with comparator countries, although significant data comparability issues make inference difficult.