The Trend Growth Rate of Employment: Past, Present, and Future

Abstract

Over the course of the recovery from the 2001 recession, many forecasters have revised downward their expectations for job growth in the United States. The often disappointing pace of employment growth has been attributed to various forces, such as the high health-care costs faced by employers, structural changes causing some industries to decline, outsourcing of jobs from the United States to other countries, and strong productivity growth. Many of these explanations imply the sluggish pace of job gains to be the result of weakness in aggregate demand and labor demand. However, some observers have suggested that broad demographic changes affecting labor supply ? such as the aging of the population ? could account for part of the sluggishness of job growth. The demographic changes may have slowed the trend growth rate of employment. A change in trend would have important implications for fiscal and monetary policy. For fiscal policy, slower trend growth in employment will tend to result in slower long-term growth in tax revenues, with potentially important effects on government programs such as Social Security. For monetary policy, assessments of the state of labor markets and the overall economy compared to sustainable trends often figure prominently in monetary policy decisions. If trend job growth were to slow, actual growth in jobs that appears weak by historical standards could exceed the new trend rate. The course of monetary policy could differ substantially if job growth were correctly realized to be above trend rather than incorrectly assessed to be at or below trend. Therefore, accurate assessments of potentially changing trends are important to effective monetary policy. Clark and Nakata examine employment and labor force indicators for evidence of a slowing of trend employment growth in the United States. They conclude that declines in the growth rates of population and labor force participation have caused the trend growth rate of employment to slow. Over the next ten years, a reasonable baseline projection for trend job growth is 1.1 percent per year, or about 120, 000 jobs per month.

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