The US Congress has given the Federal Reserve two mandates: promote price stability and full employment. Although many are concerned about inflation, it is not showing up yet in the statistics. Employment, however, continues to be an issue. Although there is nothing official as to what constitutes full employment, there is such a thing as structural unemployment, which may be higher now than in previous business cycles. Something in the vicinity of 5% to 6% would probably not strain labor markets. The Fed has publicly stated that it would like to see the unemployment rate drop to 6.5% before withdrawing monetary stimulus.
The Bureau of Labor Statistics defines unemployment. It has various definitions, ranging from U-1 through U-6. U-3, however, is considered the official unemployment rate. It is the total unemployed (“all persons who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4 week period ending with the reference week. Persons who were waiting to be recalled to a job from which they were laid off need not have been looking for work to be classified as unemployed”) as a % of the civilian labor force. U-6 is a more comprehensive number. It is calculated by taking the total unemployed, plus all persons “marginally attached” to the labor force, plus total employed part time for economic reasons, as a % of the civilian labor force plus all persons marginally attached to the labor force (marginally attached: Persons not in the labor force who want and are available for work and who have looked for a job sometime in the prior 12 months [or since the end of their last job if they held one in the last 12 months], but who are not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.)
With the official unemployment rate at 7.6% and the U-6 rate at 13.8%, the Fed still has a way to go before they have fulfilled their full employment mandate. Periodically, there have been some encouraging signs that the employment picture has been improving followed by frustrations that the unemployment rate remains frustratingly high. Although the Fed has been pursuing a policy designed to improve aggregate demand, there may be underlying structural problems that are hindering a return to full employment.
One of the issues is the labor force participation rate, the number of people in the workforce as a percentage of the civilian population. They may be employed or unemployed, but they are available and looking for work. The Bureau of Labor Statistics reports that this mildly fluctuating statistic remained about 66% through the latter months of 2008 and has been on a downward trend ever since. The labor force participation rate is currently at 63.4%. One would expect that part of the decline would be demographic as the baby boom generation retires and removes itself from the labor force. However, the baby boomers, which are just entering the expected retirement years of age 65 and
over, appear to be slow to do so. The actual participation rate for seniors, though low, has actually been rising. People are healthier now than when Social Security was enacted in 1937. And there may be an incentive to work longer as retirement savings were hit by steep stock market declines in recent years and, of course, the collapse in house prices wiping out much of their home equity. As the baby boomers age, their participation rate will eventually decline. In the meantime, opportunities for younger people are reduced. The participation rate among younger people has been hit particularly hard. Since 2008, it has dropped by 15% among 16-24 year olds and 3% in 25-34 year olds.*
While the Great Recession and the slow economic recovery have limited opportunities for younger workers, why is the participation rate dropping? Many in this demographic have sought refuge in undergraduate and graduate schools. High tuitions and burdensome student loans may turn some people away from this option. Graduates are still finding it challenging to find jobs and are forced to take part-time jobs, distorting the unemployment statics. Of employment gains this year, 15% came from bars and restaurants and 10% from temp firms.* Participation rates are also reduced by some middle-aged workers obtaining Social Security disability benefits. Those who are not participating are not looking for work and are not considered unemployed.
The Federal Reserve has an unenviable mandate. As economic growth returns to historical norms, there should be increasing job opportunities. Participation rates would be expected to rise as more people return to the work force, making it difficult for the unemployment rate to decline for some time. We can only guess what Fed policy will be. The good news is that with a rising population and a significant number of unemployed and underemployed people, there will be an ample pool of workers to accommodate robust economic growth.
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* Bureau of Labor Statistics