A few days ago, while driving to work, I heard an interview on Bloomberg radio with Randall Kroszner, an economist from the University of Chicago.  He was asked about the how the labor market was faring.  He replied that he saw many positive signs.  To paraphrase the dialogue, Dr. Kroszner stated that all the labor market data was strong.  Unemployment was at or near the lowest ever, wages were growing at a healthy rate … everything was positive, even labor force participation was solid.  That last bit surprised me.  Was labor participation really solid?

Randall Kroszner is a well-known economist who was on the President’s Council of Economic Advisers from 2001 through 2003 as well as the Federal Reserve Board of Governors from 2006 until early 2009.   Accordingly, from time to time he appears on financial television or radio.  I am aware of who he is because he was one of my professors at the University of Chicago’s Graduate School of Business (now known as the Booth School of Business) when I was a student there in the mid-1990’s.  Today, he is still there as a Deputy Dean and the Norman R. Bobins Professor of Economics.   He specializes in banking and financial regulation.

I took Dr. Kroszner’s “Money and Banking” course in my second year at Chicago.  It was a tough course where I really began to understand the way money is created through fractional reserve banking. This is a fancy way to say the process by which new money comes into being as a bank loans out deposits to a borrower.  This borrower in turn deposits that money in a bank.  That bank then lends most of that money out all over again.   In this way, the bank actually creates “money” out of thin air by the act of granting the loan to the borrower!  This enables the money supply to grow regardless of whether there is a gold standard, a central bank or a printing press.  It is at the heart of our financial system and is what makes the financial system vulnerable in downturns when creditors all want their money back at the same time.  For my current understanding, I owe a debt of gratitude to Dr. Kroszner.

So, naturally, when he is on the radio or television, I pay attention. Upon hearing him talk about labor force participation I recalled seeing the best-known data series on the subject not too long ago and thinking it suggested that the labor market was not as strong as the consensus view.


The most widely known and the bellwether data series watched by economists and financial professionals is the Labor Department’s Unemployment Rate, which currently stands at 3.5%, the lowest in over twenty years.