Economics

Why the unemployment rate may stay stuck at 8% or higher

As I have written about repeatedly, the sharp drop in the U-3 unemployment rate in late 2011 and early 2012 was far more a function of a shrinking official labor force than strong job growth. Still, the declining unemployment rate does give the Obama camp a data point to hang its hat on. And if the rate should fall below 8% by Election Day, it would surely generate a bunch of positive headlines for President Obama. And a further decline in the labor force participation rate (LFPR) would be just the thing to get the job done, even if it masks the true weakness in the labor market.

Question: Will the LFPR keep collapsing or begin to rise again as discouraged workers return to the job hunt due to the slowly improving economy? Melinda Pitts, a research economist at the Atlanta Fed, thinks the LFPR should rebound eventually, but “will likely require a much better showing of jobs numbers than were seen today before kicking in.”

The key group to watch are 25-54 year olds who have exited the labor force. In that group, there’s been a big jump in those folks indicating “School” or “Other” as their primary reason for not being in the labor force. Those back in school probably have a good chance of reentering the work force, presumably armed with new skills. But less is known about those in the “Other” category.

To try and get a handle, you first need to know how many of those individuals are classified as “marginally attached” to the labor force. As Pitts explains, “A nonparticipant who is marginally attached indicates they want employment or are available for employment. Also, they indicate having looked for a job in the previous year but not actively looking for a job at present.”

Marginally attached workers are twice as likely to move back into the labor force as those who are not. And as the below chart shows, there’s been a big surge of marginally attached workers in the “Other” category.

 

So a) the higher probability of marginally attached workers returning to the labor force combined with b) the significantly increased share of marginally attached workers in the Other category suggests c) a higher share of those in the Other group returning to the labor force than we’ve seen in the past.

But that is not happening: “The transition rate into the labor force does not fully reflect the increased level of marginal attachment to the labor force.” Again, blame the weak economy.

The good news for Obama is that given the economy’s continued mediocre growth rate, he probably doesn’t have to worry about a big U-3 surge. But neither, according to Pitts, is there reason to think that we’ve entered some sort of accelerated demographic transition where the LFPR will continue to fall, artificially lowering the U-3 rate, giving Obama a boost.

The LFPR did tick up last month—as did the U-3 rate—but the second quarter may turn out to be the growth highlight of the year.

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