Sunday, March 3, 2013
The Impact of a Decline in the Participation Rate on the Uenmployment Rate
Recently, I was interviewed for a story in the Orlando Sentinel regarding the impact of a decline in the pariticpation rate on the unemployment rate. Since it's hard for reporters to include all relevant information in an article, I decided to fill in some of the details that were missing. As has been reported in many places, the labor force participation rate has declined significantly since the start of the Great Recession, falling from 66% in December 2007 to 63.6% recently. If the participation rate was still 66%, the current unemployment rate would be more than 11% (simple math requiring no assumptions). Should the participation rate be 66%? A study by the Kansas City Federal Reserve explores it in some detail. Estimates are that about half of the decline in the participation rate was due to the aging of baby boomers, which was not a result of the recession (though it did cause many to age prematurely!). Taking that into account, a participation rate of 64.8% would result in the unemployment rate being about 9.6% (down from a peak of 10% in October 2009). Someone was quoted in the Sentinel making the point that one can't assume that if more people were participating in the labor force, that they would be unemployed. While this may be true, it's hard to imagine that more people participating in the job market would result in a noticeable increase in the number of jobs (some participants who dropped out of the labor force would have obtained jobs that others ended up getting) ; thus the primary result would still be a significantly higher unemployment rate. Does that mean there has been little improvement in the job market? The economy has added over 5 million jobs in recent years, so the job market has definitely improved, but the significant decline in the unemployment rate is due in a large part to the declining participation rate. That's why a recent consensus forecast from a survey of economists for the Wall Street Journal predicts employment rising by 2 million in 2013 while the unemployment rate only declines to 7.4% by the end of the year. According to the forecast, the rate of job creation is expected to increase, but the unemployment rate is not expected to decline as quickly as in recent years due to stabilization of the participation rate (and a possible minor rebound).