Bringing Down The Unemployment Rate – How Hard Will It Be?

Here’s a really good, short paper from the San Francisco Fed about labor force participation rates. I know that probably is inducing glaze in your eyes, but stay with me. It helps put in perspective all of the conflicting claims that you hear about how many jobs we need to create to get to a given level of unemployment.

To get a sense of how small changes in labor force participation can have large impacts on the unemployment rate, it is helpful to do a little accounting. U.S. population growth averages about 1% per year. Assuming no change in labor force participation, the economy would need to create about 100,000 jobs per month on net to keep the unemployment rate at its August 2010 value of 9.6%.

Holding the labor force participation rate constant, job growth above 100,000 per month would bring the unemployment rate down, while job growth below 100,000 would push the unemployment rate up. However, changes in participation can make a huge difference. The higher the participation rate, the greater the number of jobs needed to keep the unemployment rate down. Consider Congressional Budget Office forecasts. The CBO expects the unemployment rate to decline to 7.96% in 2012 and participation to tick up a notch to 64.8%. This implies average job growth of about 227,000 per month over the next two years. But if the CBO participation forecast is 0.1 percentage point too low, the economy will need to create 237,000 jobs, an additional 10,000 per month, in order to reach a 7.96% unemployment rate in June 2012.

This chart depicts the job growth needed to get to an 8% unemployment rate by June 2012 under various agency participation rate scenarios.

Fairly daunting given the pace of job creation right now, isn’t it?

The paper discusses the uncertainty surrounding labor force participation rates by looking at the prospects for teenagers, prime-age men and older workers. The upshot seems to be that on balance it is likely that the rate will be ticking up, thus increasing the demand for job creation throughout the economy.

Unless the economy does a major about face in the next year or so, it’s hard to see how we can possibly approach the sort of job creation numbers that will be required to start bring down unemployment towards that 8% number. The upshot of that is that scenario is poison to the political class. I see no plausible set of circumstances in which the American electorate accepts that outcome.

All of which would seem to set the table for stimulus – either via taxes or spending – as well as significant if not massive QE on the part of the Fed. I think that the outcome of the November elections will make little difference. If unemployment remains persistently high, and this study would seem to indicate that’s a strong possibility, then both Democrats and Republicans are going to boiling in the same pot. If they are then you can throw ideology out the window as they all seek survival.

Hope that they are successful. If not, then the fringe solutions begin to gain traction which leads to all sort of mischief.

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