Unemployment, Labor Force Participation and the Government Deficit
Issue: The Chart below has data on three important economic variables – the unemployment rate, the labor force participation rate and the government deficit as a percent of GDP. The unemployment and labor force participation rate variables are observed on three dates — July 2009 (near the peak of the recession) January 2017 (the month of President Trump’s inauguration), and September 2009 (the most recent month at the time of this writing.
What does this data say about the recovery after the recession under President Obama?
What does this data say about the impact of President Trump’s economic policies on the labor market and on the government deficit?
How does information from the unemployment rate and information obtained the labor force participation rate differ regarding, evaluations of the economic records for Obama and Trump, an assessment of the current strength of the economy and projections of the likely path of debt to GDP?
|Three Economic Variables|
|Labor Force Part. Rate|
|Government Deficit as % GDP|
The unemployment rate fell from 9.5 percent during the recession to 4.8 percent at the end of President Obama’s term.
The unemployment rate has continued to fall under President Trump and is currently at 3.7%. This is the lowest level since 1969.
The labor force participation rate was higher during the recession than at the end of President Obama’s term.
The labor force participation rate has not risen under President Trump despite the tax cut.
The government deficit fell from 9.8 percent of GDP in 2009 (recession year) to 3.2 percent in 2016 (last Obama year.)
The FY 2018 deficit as a percent of GDP is 4.2 percent, substantially higher than when President Obama left office.
An analysis of economic conditions and the labor market based on the unemployment rate alone would conclude that the job market and economy are red hot. The unemployment rate has not been this low since 1969. President Trump’s tax cut is one reason why the unemployment rate fell to its current level.
An analysis of the recovery from the recession and current economic condition incorporating information about the labor force participation rate, indicates the economy is not over heated.
Many critics of President Obama claimed that recovery was weak because the labor force participation rate remained very low.
The labor force participation rate is lower under President Trump than under President Obama. President Trump’s economic policies have failed to increase the labor force participation rate.
President Trump’s economic policies have increased the government deficit as a percent of GDP. The 2018 fiscal deficit is over 30 percent higher than the 2016 fiscal deficit.
My view is that the LFPR has decreased due to population aging and further stimulus will not expand the workforce. Moreover, the decrease in unemployment which coincided with the tax cut will not persist for much longer. The loss of revenues from the tax cut will be larger in FY 2019, 2020 and 2021. The budget deficit could be larger than 9 percent of GDP prior to the start of the next recession.
President Trump by reducing taxes and expanding deficits in a strong economy has weakened the ability of fiscal authorities to stimulate the economy when the next recession hits.
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