North Dakota Labor Markets & the Fed Funds Rate

(This ended up being a longer post than I thought at the start but consider that your warning.)

The Federal Reserve is still in the process of tightening rates as continued national labor market strength comes through in the data releases. Of course, there should be equal interest in the relationship between the funds rate and state level economic measures as well. In this post I focus on two labor market measures to see what we can glean from past circumstances of rate increases and labor market impacts in North Dakota.

The funds rate (as seen below) is high, but really by recent standards only. The current rate is not even the highest level for this century, and sits well below the highs reached during the last attempts to squash endemic inflation. Still, it is at levels not seen in more than a decade which does make it beyond the experience of a significant number of people.

The labor force participation rate gets a fair amount of attention here due to discussions about the willingness of different age cohorts to work. That argument tends to be weak and largely based on national level talking points which are weak even at that level, let alone when misapplied to other geographies. However it is interesting that North Dakota has seen a decline in labor force participation over the last decade, as seen below.

The peak prior to 2010 was just short of 75 while the current level sits around 68.5. I think the most interesting thing about the downward trend here is it occurred during the oil industry expansion in the Bakken area. (It is not the topic of this post but it bears considering whether there were income and substitution effects changing the labor-leisure tradeoff and other decisions.)

The scatter plot below would seem to indicate a negative correlation between the labor force participation rate and the funds rate. I color coded based on decades and it clearly appears that there are different patterns across the different decades. So before we conclude the funds rate increases are likely to create decreases in participation we might want to visualize this a different way.

I broke the data out by decade and included a smooth line for each decade and then stacked them along the funds rate axis to see any differences. This breakout makes it less clear that there is strong negative relationship in all but the 1980s. I would not interpret the relative flat relationship from the 1990s on as an indication of no relationship. I suspect this is more to do with the binding labor supply constraint in North Dakota right now.

I look at the unemployment rate in North Dakota as well to see if there is another labor market measure provides any further insights. With the obvious exception of the COVID-19 surge in unemployment, the state of North Dakota experienced low unemployment that declined further during surges in state economic sectors such as oil. The unemployment rate declined from a low 4% in January 2010 to 2% in January 2020, the same time period when labor force participation in the state peaked and declined.

Over the longer run it appears there is a positive relationship in North Dakota between the unemployment rate and the level of the funds rate. The specific mechanisms of such a relationship will be left for later discussion in another post. The color identification of the decades seems to indicate again the need for breaking the data out by decades to get some better sense if this is just an artifact of the long time frame for the data.

As the graph below it does seem that there is not a strong positive relationship between the the unemployment rate and the funds rate. In fact it seems that, since the 2000s, there is a negative trend between the unemployment rate in North Dakota and the funds rate. Again, the specific mechanisms of the relationship need some further thought. Once again it seems this might be more indicative of artifacts of the data split out by time and more about the supply constrained labor market in North Dakota than any other major economic factor.

Clearly the discussion above barely scratches the surface. There are time lags to consider for policy and other economic factors that need to be integrated into the discussion. There are other labor market measures to look at, but this is long enough as it is and there are more factors to discuss as well for the state and national economic picture.

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