Now that the economy has added more than 200,000 jobs for the third month in a row – February’s report showed a net gain of 227,000 – it’s time to stop beating around the bush. This is no longer a temporary bump or phase; we are now smack dab in the middle of a recovery that is no longer fragile or on life support. While not quite as robust as some would’ve preferred, it is nonetheless significant. Indeed, the Bureau of Labor Statistics – or as the Right likes to call it, the Kremlin – revised the job numbers upwards for the last two months. January’s went from 244,000 to 284,000 and December’s went from 203,000 to 223,000. Had it not been for the public sector shedding jobs over the last twelve months, those numbers would’ve been higher still.
So, with such good news, why then did the unemployment rate remain at 8.3%? You know how they say that no good deed goes unpunished, right? Well it’s no less true when discussing unemployment. Now that the economy is improving, more people are getting back into the labor market and are looking for work. While this is certainly encouraging news it has the unintended consequence of bumping up unemployment.
It’s referred to as the labor force participation rate: the percentage of working-age people from 16 to 64 who are either working or looking for work. Typically in a healthy economy the labor force participation rate would be between 67% and 68%. As late as October, 2008, it was around 66%.
Then the wheels came off. The economy started its nose dive into the Great Recession. The unemployment rate began rising precipitously, and the labor force participation rate started declining as more and more displaced workers grew discouraged at their employment prospects and dropped out of the labor market. This January’s labor force participation rate was 63.7%, the lowest in decades. Last month it rose to 63.9%. That .2% rise was sufficient enough to prevent the unemployment rate from falling, even with a net gain of 227,000 jobs.
Economists now believe that the labor force participation rate will continue to rise steadily as the recovery continues to pick up steam. Translation, as more jobs are added, more people will start looking for work again. And that could spell trouble for the Obama Administration as the fall elections near. An economy adding 250,000 jobs per month, under normal circumstances, would’ve been enough to reduce the unemployment rate to 7.3% by December. But that assumption was based on the labor force participation rate remaining at 63.7%; an unrealistic expectation given that good news tends to travel fast.
For instance, if the labor force participation rate rose to just 64% and stayed there for the balance of the year – again highly unlikely – the unemployment rate would be 7.8% by end of year. But if it were to go up over 64% – say 64.5%, which is still considerably below the norm – we’d be looking at unemployment over 8% for the remainder of the year, that is assuming an average of 250,000 net jobs per month. The bottom line is that to offset the effect of an increase in labor force participation and make a significant dent in unemployment in time for the fall elections, the economy is going to have to add more jobs than it currently is adding, say 300,000 to 350,000. A tall order even before the recession hit.
Maybe that was what Gallup was doing in its February jobs’ poll. Though they seriously overstated a rise in the labor force participation rate last month – not to mention failing to include anyone under 18 or allowing for seasonal variations, which no doubt led to their erroneous 9.1% unemployment rate prediction – they did nonetheless underscore the importance of taking into account the impact more and more people in the labor market would have on the overall numbers.
This has been the 800 pound gorilla in the room that most of us haven’t wanted to acknowledge for well over a year. Well there’s no getting around it anymore. Now that the economic recovery is no longer a well-kept secret, more and more people are going to demand their rightful piece of it. And that is both good and potentially ominous.
Links:
http://ycharts.com/indicators/labor_force_participation_rate
http://www.calculatedriskblog.com/2012/02/impact-of-changes-in-participation-rate.html
http://data.bls.gov/timeseries/LNS14000000
http://www.washingtonpost.com/blogs/ezra-klein/post/february-jobs-report-lets-call-it-a-recovery/2012/03/09/gIQADJ8B1R_blog.html
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