Unemployment and the labour force | FT Alphaville

Unemployment and the labour force

The San Francisco Fed looks at an issue that is important to understanding the US unemployment problem but often is neglected in broader debates over cyclical vs structural influences.

The labour force participation rate is the percentage of the total working-age population that is employed or looking for work. In previous recessions, a significant decline in the rate was normally attributable to structural factors such as demographics, with cyclical factors having only a marginal effect.

But not this time:

The current situation is quite different.  Movements of the labor force participation rate have been relatively large since the beginning of the recession that began in December 2007. In addition, they have departed from regular cyclical patterns, making them hard to predict.

As of August 2010, labor force participation was 64.7%, down from its pre-recession level of about 66%. This decline reflects a large-scale exit of workers from the labor force over the past few years. Its future path is uncertain and will be shaped both by the cyclical rebound from a severe recession and structural changes that will unfold as the baby-boom generation reaches retirement age.  These dual changes—cyclical and structural—have magnified the difficulty of predicting the near-term path of labor force participation.

As the United States recovers from recession, the cyclical response of labor force participation hinges on whether those who lost their jobs and left the labor force return. This in turn depends on what they did when they were out of the labor force. Were they waiting for a better economy? Did they go back to school, retire, join the disability benefit rolls, or something else? These cyclical uncertainties are compounded by secular trends that affect labor force participation, including the movement of the population into age groups with lower participation rates and the continued increase in school enrollment rates among teenagers and young adults. The secular patterns may in turn be affected by lost wealth and declines in household earnings stemming from recessionary cyclical disruptions. Forecasters must estimate the net effect on labor force participation of all these behavioral changes. As we show below, this has resulted in widely different estimates by government forecasting agencies.

And here is a chart embedded in the paper:

Given the differing forecasts of the labour force participation rate by various agencies, the chart shows just how many jobs the economy needs to create each month to reduce the unemployment rate to 8% by 2012.

As the paper notes, this is partly an accounting exercise, and the reasons people are leaving and entering the labour force are more important than the actual participation rate — and this same logic applies to the unemployment rate, which itself matters less than the factors that explain it.

Still, as if we needed more evidence, the chart above does illustrate clearly the inadequacy of the current pace of job creation. The Social Security Administration has the lowest forecast for the labour force participation rate (64.6% by 2012), and even under that assumption the economy still needs to add about 200,000 jobs each month.

The August payroll numbers revealed that the economy had increased the number of private-sector jobs by 60,000 — and that was less than the 89,000 created in July.

Still a long way to go.

Related links:
Labor Force Participation and the Future Path of Unemployment – San Fran Fed
The debate over US unemployment – FT Alphaville
Final thoughts on the payroll numbers – FT Alphaville