Source: Wells Fargo Securities Economics Group
Stable Flying at a Low Altitude?
Over the past three months, labor force participation has averaged 63.7 percent, the same as the average for 2012. If the participation rate holds steady, how many new jobs are needed to lower the unemployment rate?
The steady employment gains in recent months suggest a rough answer. The unemployment rate has been 7.9 percent, 7.8 percent and 7.8 percent for the past three months, while the labor force participation rate has been 63.8 percent, 63.6 percent and 63.6 percent. Meanwhile, job gains have averaged 151,000. Therefore, it appears that the magic number is something above 151,000 jobs per month to lower the unemployment rate.
Unfortunately, we have only averaged 153,000 new jobs each month over the past two years, while the 12-month average of the labor force participation rate has fallen a full percentage point. This suggests that if the labor force participation rate remains the same, then declines in the unemployment rate will be difficult to come by given the current fiscal, trade and regulatory policy environments (top chart).
If This Is It, then What About the Long-Term Unemployed?
The average duration of unemployment continues to stand near the record high at 40 weeks. This data suggest many workers face severely long spells of unemployment, and that the headline unemployment rate does not fully capture the severity of the unemployment experience for millions of Americans. For the unemployed, the lack of job opportunities has not only cost workers in terms of lost wages, but also in skills that have atrophied over time. Historically, workers with long durations of unemployment are less likely to find employment. If this is it, then there is little good news for the long-term unemployed in terms of getting the old job back, let alone at the old location and the old wage and benefit scale.
TheWorkout Remains to Be Much Longer than Many Suspected
The long, subpar recovery in jobs has also been more drawn out then many had expected (bottom graph). More than three years into the recovery, just over half (54 percent) of the jobs lost in this cycle have been recovered. While the unemployment rate has come down from its cycle high of 10 percent, the employment-population ratio, at 58.6 percent, is only 0.1 percentage point higher then when employment began to recover and a far cry from 62.7 percent when the past recession began.
Recent policy moves are likely to discourage a pickup in job creation. Higher marginal tax rates will lower the returns for working for some, especially those in two-earner households where the income earned by the second worker is small relative to the primary worker. In addition, extended unemployment benefits will alter the trade-off between work and unemployment and put an upward bias to the unemployment rate.