Grasping Reality by Brad DeLong

for the first two years of our current Lesser Depression, the labor force tracked almost exactly what we would have expected from the previous post-WWII experience of the correlation between changes in employment and the labor force, even though the post-January 2008 change in the employment-to-population ratio was far outside the previous post-WWII range of variation. By the start of 2010, the employment-to-population ratio had fallen 4.4% points below its start-of-2008 value, and that fall in employment had carried the labor force participation rate down by 1.4% points.

In the two years starting in January 2010, however, the previous relationship between employment and labor force participation broke down. Today the employment-to-population ratio is 0.3% points above its value of two years ago. But the labor force participation rate is not 0.2% points higher but rather 0.6% points lower than it was two years ago.

The natural fear is that this shows transitory cyclical non-employment turning into permanent structural non-employment as a result of persistent depression. The labor-force participation ratio is 0.8% points below where we would four years ago have expected it to be had we known then what the employment-to-population ratio would be today. Under the ancillary assumption that the gap between the employment-to-population and the labor-force participation ratios--the unemployment rate--is a sufficient statistic for the gap between the current state of the economy and the economy's sustainable potential employment level, the high and persistent employment of the past two years have robbed America of roughly 0.8%/65% = 0.012 one-eightieth of potential employment, and 0.8% of its potential output.

If this is indeed a permanent cost to the economy's long-run growth path from our current Lesser Depression, the shadow it casts on our future is wide, long, and deep indeed.