The Northern Frontier: What Prime-Age Employment In The US & Canada Reveal

The prime-age employment-to-population (PA EPOP) ratio is better than the headline (U-3) unemployment rate as a barometer of labor utilization. Canada shows us that even when PA EPOP is pushed to new highs, wage and price acceleration does not necessarily follow or persist. It is time we rethink the interactions between labor markets and inflation.

Figure 1: While the US is still meaningfully below its historic high on the prime-age employment rate, Canada is both higher than the US and high relative to its own history. (Source: Bureau of Labor Statistics [BLS], Statistics Canada)

Figure 2: Despite elevated levels of labor utilization (Figure 1), Canada is not seeing meaningful inflation pressures. CPI refers to the consumer price index. “CPI-trim”, “CPI-median”, and “CPI-common” are the Bank of Canada’s preferred methods for “seeing through” short-term inflation volatility. (Source: Bank of Canada, Statistics Canada)

Figure 3: Despite elevated levels of labor utilization (Figure 1), Canada has seen few signs of sustained wage acceleration. “Wage-common” is the Bank of Canada’s preferred approach for aggregating four different methods for measuring wage growth. (Source: Bank of Canada, Statistics Canada)

Employment-to-population (EPOP) ratios measure labor utilization more robustly than unemployment rates.

The Fed’s approach to policymaking and communication should reflect this reality. It claims to be looking at alternative measures of labor market slack, but in practice, they serve mostly as secondary and tertiary supplements.

Ahn & Hamilton (2019) highlight a core problem in the Current Population Survey (CPS), which is used for calculating the headline (U-3) unemployment rate.

Figure 4: For conceptual purposes only — not actual data

• The CPS does a poor job of distinguishing between those who are not participating in the labor force and those who are participating but unemployed. This blurry distinction likely leads to persistent but time-varying underestimation of the labor force participation rate and the unemployment rate. (Figure 4)
• The CPS can more robustly distinguish between who is employed and who is not employed. As a result, EPOP ratios are a more robust starting point.

The challenge with the headline EPOP ratio is that there are acyclical demographic trends that also require adjustment.

• To adjust crudely, EPOP for prime-age cohorts (25–54) would remove the major acyclical trends related to schooling, which mostly affects those younger than 25, and retirement, which mostly…