A strengthening economy that encourages more Americans to seek work would have a paradoxical effect: Making it harder to lower the unemployment rate to the level Federal Reserve policy makers want to reach before considering an interest-rate increase.
Fed officials in June forecast the jobless rate will fall to 6.5% to 6.8% in the fourth quarter of 2014, down from last month’s 7.6%. Policy makers have pledged to keep their target interest rate near zero “at least as long” as unemployment is above 6.5%, and with more people looking for jobs, it may take until 2015 to reach that threshold.
Currently, “there are a fair number of discouraged workers that don’t want to look because the chances of finding something are so low,” said Jesse Rothstein, a former chief economist at the Labor Department who now teaches economics and public policy at the University of California, Berkeley. As the outlook improves, the result could be that “unemployment will fall slowly as people start flooding back in” seeking work.
The worst recession since the Great Depression arrested the growth of the workforce, as thousands gave up searching for jobs, filed for disability, went back to school or retired early. That brought the labor force participation rate -- the proportion of the working-age population either holding a job or looking for one -- below its long-run trend. Participation dropped to 63.3% in March, the lowest since May 1979, when Jimmy Carter was president.
In June, there were 2.6 million Americans interested in working who remained outside of the labor force because of discouragement, illness, or school, according to Bureau of Labor Statistics data. That’s up from 2.2 million in June 2009, when the recession ended.
Now, with the economy entering its fifth year of expansion, more people see improved chances of finding work. As they re- enter the workforce, not everyone will find a job right away. The result: A stable or rising participation rate and a slower decline in the unemployment rate.
The jobless numbers are calculated as a percentage of the total labor force, which includes people with jobs and those seeking work.
Joel Prakken, senior managing director of Macroeconomic Advisers LLC, the St. Louis forecasting firm, estimates that a “cyclical rebound in participation” will roughly offset structural forces, such as an aging population and rising disability rolls, that are drawing people permanently out of the labor force.