Is It Time to Raise Interest Rates?

Based on input from Center for Policy and Economic Research

Econintersect:  When the Federal Reserve’s Federal Open Market Committee meets next week, higher interest rates are sure to be on the agenda. In an effort to reduce unemployment in the wake of the recession, the Fed has held rates at historic lows. Some observers believe that the economy has recovered sufficiently to raise rates at some point this year. While the unemployment rate has fallen since the highs of the recession, a new paper from the Center for Economic and Policy Research (CEPR) indicates that the labor market is still far from a full recovery.

The report, “Measuring Recovery: Why the Prime-Age EPOP Ratio Tells Us Not to Raise Rates,” examines the employment-to-population (EPOP) ratio for working people between the ages of 25 to 54. This is the period of people’s lives that they are most likely to be employed. By looking at these “prime-age” workers, the author is able to eliminate problems with the Bureau of Labor Statistics definition of employment and the changing age distribution of the population.

According to the author, Nicholas Buffie, a CEPR Research Assistant:

“The prime-age EPOP has risen steadily since the recession.  But at this point, the EPOP ratio for these workers shows that the labor market has just made up 48 percent of the employment lost during the recession.”

In addition to looking at the overall EPOP ratio for these workers, Buffie also breaks out the employment data by race and gender. For instance, he notes that while men experienced a greater drop in employment during the recession, they also recovered a greater percentage of their lost unemployment, meaning that as of March of 2015, men and women had seen nearly equivalent net employment losses since December of 2007.

In terms of race, African Americans have fared significantly worse than other groups. The EPOP for African Americans remains a full 4.3 percentage points away from recovering jobs lost to the recession. Latinos have experienced the strongest recovery with their EPOP recovering 57 percent of the decline from the recession. The weakest recovery has been among Asian Americans with just 15 percent of the drop recouped, although this group did see the smallest initial decline.

The evidence based on an examination of employment-to-population ratios is clear: The labor market is still far from recovery. Acting to raise interest rates now would further slow the economy’s growth and delay a return to pre-recession levels of employment.

Click on the following cover page image to read the entire report:

Click to read complete report.

John Lounsbury