Bloomberg News

Unemployment Decline Masks Drop in U.S. Labor Force: Economy

February 14, 2012

Feb. 8 (Bloomberg) -- The unemployment rate’s unexpected drop to a three-year low has overshadowed a less-positive labor- market development: fewer Americans are looking for work.

Last week’s Labor Department announcement that the jobless rate fell to 8.3 percent in January sent stocks and bond yields higher. The same report showed the share of working-age people in the labor force had declined to the lowest level in 29 years.

The so-called participation rate was cited by Federal Reserve Chairman Ben S. Bernanke yesterday to support his assessment that the rate of unemployment obscures vulnerabilities in the job market. Bernanke, speaking to the Senate Budget Committee, confirmed the Fed’s stance that interest rates will stay low at least through late 2014, and repeated his view that the job market is a “long way” from returning to normal.

“Weakness in the labor force is frustrating to the Fed, which needs to see broadened participation from labor in this recovery,” said Eric Green, chief market economist at TD Securities Inc. in New York. “What the Fed wants is the real stuff. They want unemployment falling with the labor force rising.”

Stocks were little changed today as investors waited for the outcome of negotiations among Greek leaders aimed at securing more rescue funds. The Standard & Poor’s 500 Index rose 0.2 percent to 1,349.79 at 9:48 a.m. in New York.

In Europe today, German exports slumped 4.3 percent in December from the previous month as the sovereign debt crisis slowed growth across the euro region.

Missing Workers

The Labor Department last week boosted the count of the U.S. working-age population by 1.51 million people based on findings from the 2010 Census. Of those, 1.25 million, or 83 percent, weren’t in the workforce, the data showed.

The adjustments are traditionally plugged lump-sum into the January data even though they represent changes that developed over the past decade. The jump in the count of those not in the labor force caused the participation rate to drop to 63.7 percent last month, the lowest since May 1983. About 88 million Americans aged 16 years or older didn’t have a job and weren’t trying to find one, the new data showed.

The unemployment rate, which only counts people who say they are actively looking for work, would be higher if some of those sought employment.

Bernanke’s View

“It is very important to look not just at the unemployment rate,” Bernanke said in response to questions during yesterday’s hearing. “The 8.3 percent no doubt understates the weakness of the labor market in some broad sense.” Some people are leaving the workforce because they can’t find jobs, and others are taking part-time jobs because they can’t find full- time employment, he said.

At the conclusion of a two-day meeting on Jan. 25, the Federal Open Market Committee said that the economic outlook, restrained by “low rates of resource utilization,” would probably warrant near-zero interest rates through at least late 2014. The Fed officials projected the unemployment rate would be between 8.2 percent and 8.5 percent in the last three months of 2012.

While unemployment fell 1.4 percentage points over the past 24 months, the participation rate dropped 1.1 percentage points. Additionally, the share of Americans with jobs, known as the employment-to-population ratio, hasn’t budged, holding at 58.5 last month, the same as in January 2010.

“We should be taking actions that boost employment growth, including signals from the Fed that they aren’t going to tighten up even if there is a slight whiff of inflation,” said Jesse Rothstein, an associate professor of public policy and economics at the University of California at Berkeley and a former chief economist at the Bureau of Labor Statistics. “There is not much news that changes our view of the economy.”

Older and Younger

A breakdown of the new Census numbers helps explain why the participation rate is even lower than previously estimated. About 1.29 million of the gain in the working-age population came from those 55 years and older, while another 521,000 were 16 to 24 year-olds, two groups that traditionally have lower participation rates. The count of those 25 to 54 years old, considered the prime employment years, dropped by 299,000.

Women accounted for all the increase in the population total, while the number of men fell. Ethnically, the count of Asians and Hispanics grew, while whites decreased.

“The bump that you see from moving to 2010 is pretty small because we were pretty close with our population estimates,” Tori Velkoff, assistant division chief in charge of estimates and projections for the U.S. Census Bureau, said in a telephone interview on Feb. 3. The adjustments were “pretty typical,” she said, and “groups that we were a little low on, we’re trying to figure out why that might have been.”

Monetary Policy

The argument for how long the Fed should maintain stimulus hinges on whether policy makers view the drop in participation as a long-lasting shift in demographics, or a shorter-term shock that will soon be reversed. Monetary policy is aimed at cushioning the economy from temporary shifts.

A research paper published Feb. 1 by economists at the Federal Reserve Bank of Chicago argues that the most recent decline is a result of the recession. About three-quarters of the 1.8 percentage points drop in the participation rate among those aged 16 to 79 over the past three years is due to severity of the slump, the report said. Only about a quarter of that decrease reflects long-run demographic changes.

Slack in the job market can also be seen in measures of openings and pay.

Tepid Earnings

Hourly earnings were up 1.9 percent in January from the same month in 2011 on average, the smallest year-over-year gain since April, last week’s report from the Labor Department showed. For production workers, the 1.5 percent increase was the smallest in records going back to 1965.

There were almost four unemployed workers in December for each position waiting to be filled, a report yesterday showed. When the 18-month recession began in December 2007, there were less than two vying for each opening.

“We’re very depressed relative to normal trend levels in terms of employment and output,” Michael Darda, chief market strategist at MKM Partners LP, said in a Feb. 6 interview on Bloomberg Television. “So you really do need a period of above- trend growth. That’s what the Federal Reserve is trying to do.”

--With assistance from Craig Torres in Washington. Editors: Carlos Torres, Vince Golle

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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