New research challenges the conventional wisdom that the unemployment rate is falling because workers have given up looking for a job and have exited the labor force, and the rate likely will climb again once these discouraged Americans renew their search for a job.
In a March 1 report titled “Dispelling an Urban Legend,” economist Dean Maki at Barclays Capital, part of the British financial giant Barclays, argued that the size of the U.S. workforce is shrinking as aging baby boomers hit retirement age amid a sluggish economy. This — not the so-called missing workers from the labor force — may be knocking down the jobless rate faster than expected.
“Based on our reading of the evidence, the conventional view that in recoveries the unemployment rate will stop falling and even start to rise because of surging labor force participation rates amounts to something of an urban legend,” Maki and his colleagues concluded. “Such an event has not happened in the past and we do not believe it will this time either.”
The jobless rate has fallen for five consecutive months and now stands at 8.3 percent ahead of Friday’s release of February jobs numbers by the Labor Department. A key private-sector gauge of employment, the ADP National Employment Report, was released Wednesday and showed a better than expected 216,000 private-sector jobs added last month. Historically, the ADP has been a good gauge of what the government’s report will show days later.
If the research from Barclays Capital is right, President Barack Obama’s re-election chances could get a big boost. Already, the falling unemployment rate has helped bring up his approval numbers in opinion polls, and gauges of consumer confidence are turning more positive.
Maki’s findings are not necessarily a great development, however, because implicit in a shrinking labor force participation rate is slower economic growth. A smaller labor force means a smaller economy, and Barclays Capital expects sluggish growth in the range of 2.5 percent this year and next.
In an interview, Maki said he expects the unemployment rate to keep falling this year, to end the year at about 7.8 percent. Next year the rate would fall to about 7 percent, according to his projections. That’s considerably better than the Federal Reserve Board’s January central tendency forecast, which put the unemployment rate at the end of this year between 8.2 percent and 8.5 percent, and next year between 7.4 percent and 8.1 percent.
“Really what this (study) is saying is, it is a lot easier to push the unemployment rate down than it used to be,” said Maki.
That’s because demographics are at play, he said, and not the so-called missing workers who have vanished from the labor force. The Republican National Committee issued a Feb. 6 research note on “The Missing Worker,” dismissing the falling unemployment rate as a phenomenon explained by workers who have exited the labor market, giving up on their job prospects.
During the economic expansion from 2003 to late 2007, the labor force participation rate was about 66 percent. It fell amid the recession and has been trending around 64 percent. It has led to the view that the dynamics will change when workers who exited the labor market feel confident enough to start looking for work again.
But Maki thinks the onslaught of retiring boomers — Americans born between 1946 and 1964 — will continue to pull down the labor force participation rate even as discouraged workers resume looking for jobs. The crux of his argument is that the labor force is growing more slowly, and that by itself is holding the jobless rate down.
Barclays’ research found, in fact, that unemployed re-entrants to the workforce as a share of the labor force stood at 2.2 percent in January 2012, compared to 1.3 percent in August 2007, months before the December start of the Great Recession. That means re-entrants to the workforce are already twice that of pre-recession levels, and yet the unemployment rate has fallen from a high of 10 percent in October 2009 to 8.3 percent in January 2012.
A Feb. 11, 2011, research note by economists at Goldman Sachs came to similar conclusions about what last year was a 9 percent unemployment rate. However, they said that some 200,000 new jobs per month were needed to get the jobless rate to 8 percent by the end of this year. Job growth has been weaker than that, yet the unemployment rate is at 8.3 percent.
“Economic recovery should draw some additional workers into the labor force in the next 1-2 years. But there is little evidence for the idea that an ‘unduly’ low participation rate is masking an even weaker labor market than indicated by the 9 percent unemployment rate,” the Goldman economists wrote. “Instead, we find that most of the drop in participation in recent years reflects changes in the underlying demographics and the ‘normal’ effects of the economic cycle.”
Heidi Shierholz, a labor economist at the liberal Economic Policy Institute, agrees with Maki’s view that the so-called missing workers won’t start looking for work until they are confident of finding a job. That would require many months of solid job growth. But Shierholz argued that Maki’s research actually shows that more than half of the job losses since 2008 were due to cyclical factors tied to the recession and not structural changes, such as older workers retiring.
“So if those workers don’t come back before the longer-run structural trends towards declining (labor force participation rate) catch up, it is because of policy choices we are not making” to stimulate economic activity, she said.
The Barclays Capital research projected long-run economic growth around 2 percent, below historical trends and also below the Fed’s long-run central-tendency forecast of long-term growth between 2.3 percent and 2.6 percent. As a mature, advanced economy, U.S. growth rates tend to be far slower than up-and-coming economies such as China, India and Brazil. But slowing below historical trends carries all sorts of implications.
“That’s not a good thing, thinking about long-term budgets,” Maki said, suggesting the trend will strain federal tax revenues, thus heightening problems with deficits and debt. It also suggests strains on federal health and retirement programs such as Medicare and Social Security.
“This is the world we’re in now, and it’s best to fully understand these changes that are happening,” Maki said.
Source: MCT Information Services