Demographically Adjusting Working Age Employment

I've mentioned in the past that my preferred indicator of economic slack is the employment to working age population rate (or, equivalently, the employment rate of people between the age of 15 and 64). This measure is a lot better than the employment to population ratio for obvious reasons: it takes aging into account, which serves to explain the lack of employment growth since 2008; most of the decline in the employment to population ratio since the Great Recession is secular and solely happened because of older people retiring. 

The employment to working age population ratio is not without its own problems though. Perhaps the biggest of these is the fact that it fails to take into account women entering the labor force during most of the twentieth century. Because of this, the employment to working age population ratio is skewed downward between 1970 and 1990 and skewed upward in the 1990's (because women entering the labor force enables some men to leave it).

In order to solve the gender problem, I decided to try to remove the skew created by women entering and men leaving the labor force. First, I took the male employment to working age population ratio and postulated a linear downward trend. I then determined the cyclical gap in male employment and assumed that women would experience the same cyclical underemployment as men. From this, I could determine 'equilibrium' female employment and determine a trend. 

I postulated that the trend for female employment would be quadratic -- it would increase quickly at the beginning of the time series and then level out (this is technically more logarithmic, but the logarithmic function had a terrible fit). This matched pretty well with the data, so I now had a trend value for female employment.

It was now possible to determine demographically adjusted female employment by taking the actual employment rate and adding the gap between the 'full employment' rate (which I assumed to be about 80%, the male employment rate in 1990) and the trend employment rate. The same process could be done to the male employment rate and the linear downward trend. 

Now, with the demographically adjusted female and male employment rates, I could determine the full demographically adjusted rate. Given that 

$$\frac{E_m}{WAP_m}\frac{WAP_m}{WAP} + \frac{E_f}{WAP_f}\frac{WAP_f}{WAP} = \frac{E_t}{WAP}$$

where $E_{gender}$ is [gender] employment and $WAP_{gender}$ is [gender] working age population, I could simply multiply each gender's adjusted employment rate by their percentage of the total working age population.

Here is the demographically adjusted employment rate:

And here is the non-demographically adjusted measure:

A Dialogue Between My Friend and I Concerning Welfare

Friend: Is the line "Welfare creates dependency" true in any way?
Me: Yes...
Me: ...and no.
Me: Dependency is the wrong word;
Me: "Advantage taking" is better
Friend: Interesting...
Me: The real question that people should ask is "is welfare socially beneficial?"
Me: Conservatives site lower employment as a problem.
Me: Liberals think that welfare is socially advantageous.
Me: I think I agree more with the liberals on the social part and conservatives on the sheer economics.
Friend: Here's a follow up question...
Friend: Has welfare benefited America?
Me: It depends on what you mean by benefit: incomes are higher, but employment may not be. Conservatives like to use low employment as a criticism of welfare in America while liberals focus on the actual increase in income; whether it's from people working or due to benefits from the government.
Me: Either way, Americans may be worse off because they don't have jobs...
Me: ...but that may be outweighed by their higher incomes.
Friend: I'd say in the social factor at least, the newer generations have been leading better lives.
Friend: I'd say at least slightly, but I think the environments many have grown up with have continued the cycle...
Friend: ...instilled a cycle
Me: The cycle argument really isn't economically viable*...
Friend: All right.
Me: The existence of incentives to work - wages; and not to work - welfare are more important to the welfare situation.
Me: The solution is to make the market wage higher than the amount people can get from welfare.
Me: This can be effected by jobs training and better education
Friend: So the opposite, say lowering the amount people can get from welfare instead of raising the wage would not work because... ?
Me: That would work too
Me: But it's more difficult...
Me: ...and likely bad socially.
Friend: hmm...

*The reason that the "cycle" argument doesn't line up economically is that employment decisions in normal (macro)economic models are entirely due to balancing a dislike for work and an attraction to consumption. This means that the argument that welfare creates an inter-generational cycle of poverty is neither needed to fit empirical data nor present in the way that (macro)economists think about welfare and employment.