Will the Unemployment Rate Stall in 2013?
As the economy continues to recover from the Great Recession, a large pool of discouraged workers is poised to return to the labor force. Because these workers are not included in the official unemployment picture, their return to the labor market will impact the future of the unemployment rate. FRBSF Economist Òscar Jordà discusses these relationships in detail and their potential impacts on policy.
Watch this short clip for some quick definitions of terms used in the video.
This video is also available on our YouTube channel.
Flip Your Classroom
Use this teaching guide to deepen student understanding of the unemployment rate and why changes in job behavior are critical to both the health of the economy and for policymakers at the Federal Reserve.
Teaching Guide (pdf, 112 kb)
Student Instructions (pdf, 118 kb)
DataPost: Unemployment Rate: Measuring the Workforce
00:07 It’s been striking, the last year the unemployment rate has come down by one percentage point. That is fast; that is twice as fast, the rate of decline that we saw in the last two years. It’s a little surprising, because the economic activity this year has been a little moderate. So going forward, we need to ask, is the unemployment rate going to continue to decline at this clip? And if it does or it does not, what implications does that have for policy?
00:29 Thinking of policy, when we consider the amount of slack in the economy, we have to consider two things. Historically speaking, the unemployment rate is still high, but there’s also another factor that we need to think about, and that is there's a large pool of workers that are not being counted in the unemployment rate. We call them discouraged workers. And that pool really could come back to the labor market at any point if these workers really had the chance of getting a job. And so we need to count those two elements when we think about how much slack there is in the economy before we go forward.
01:02 Now, in which ways is the great recession different from previous downturns? Well, let’s begin with what happened. It was a very rapid and very massive employment loss of 8.6 million workers. And the recovery has been relatively slow. That has caused the number of workers, even those that remain in the unemployment pool, to experience unemployment for much longer than has been historically the case. In fact, 40% of the unemployed have been unemployed for 27 weeks or more, the largest proportion since World War II.
01:33 Well, let’s go back to this pool of what I call discouraged workers. They are out, but they want in. We don’t have data going back very far, starting in 1994. Since then we do know who these individuals are. Back in 1994 about 3% of the population were classified as discouraged, meaning that they would be willing to come back if a job were offered, but were not actively looking for a job.
01:58 Then that rate declined rapidly, and in 2000, it stayed at about a level of 2% of the population. And since the great recession, it started to climb back up. Now it climbed back up to about a level of 2.7% of the population. What does that mean? Well, it means that we have potentially about two million workers more that are discouraged than we had only a few years back. And if those two million workers decided to come back and join the labor force, be more actively engaged in looking for a job or even getting a job themselves, that could rapidly change the arithmetic of how the unemployment rate is going to behave in the next year.
02:33 Think about this. If things stay the same, the same rate of employment creation, and these discouraged workers remain outside of the labor force, then we would expect the unemployment rate over the next year to decline to about 7.4 by the end of 2013. But what if some of these workers started returning at the same rate that we saw in the 90s? Well, then we would see the unemployment rate basically stall, or stay at the same level of 7.7% currently, all the way through the end of 2013, possibly a little bit longer.
03:06 But what if these workers, for some reason, really came back quickly, because maybe conditions in the labor market improve, or at least perceptions of what was going on in the labor market improved. The more quickly they come back, then the more pressure they put on the labor market, and that could mean the unemployment rate could even go up a little bit, even all the way to 8% by the end of 2013—a reversal of the trend that we've seen in the last three years.
03:32 So how should we think about these effects, especially in the context of policy? In the past, when we looked at the labor market, the unemployment rate was a good summary statistic of what was going on. This time around, with the great recession, it makes it that much more difficult to think about the unemployment rate in isolation, without thinking about what is going on with the discouraged workers.
03:54 Remember that the Federal Reserve has two mandates. One is maximum employment; the other one is stable prices. So one of the challenges of policy making in general is to assess how much slack there is in the labor force, and how that can affect prices.
04:09 Think about this: the more slack there is in the labor market, the less pressure on wages, the less pressure on prices, and therefore the more accommodating monetary policy can be without triggering inflation.
04:21 So what shall we conclude from this? It’s really become a lot harder to think about what’s going to happen to the unemployment rate than in the past, and that’s largely due to two factors. One is we think that the economy has been relatively stable, and it’s going to continue to improve. And that’s going to generate a reasonable amount of employment. But there's another factor that makes this a little bit more difficult than usual, and that is that a pool of these workers, of discouraged workers, is probably there due to cyclical factors that will reverse as the economy improves. And some of these individuals may start joining the labor force in numbers that we haven't seen in a while.
04:59 That makes predicting the unemployment rate difficult. And if these individuals come back to the labor force quickly that could mean that we will see the unemployment rate come down much more slowly than we’ve seen in the last year.
About the Speaker
Òscar Jordà is a Research Advisor in the Macroeconomic Research Group at the Federal Reserve Bank of San Francisco. His areas of research interest include econometrics, macroeconomics, and monetary economics. See his research page.
"Will the Jobless Rate Drop Take a Break?" Daly, Mary C., Early Elias, Bart Hobijn, and Oscar Jorda. FRBSF Economic Letter. (December 17, 2012).
"Labor Force Participation Rates: Measuring Workforce Engagement." FRBSF DataPost educational series. (January 7, 2013).
"Unemployment Rate: Measuring the Workforce." FRBSF DataPost educational series. (March 11, 2013).
"U.S. Labor Markets: Longer-term Perspective." FRBSF Video: Economics in Person (April 30, 2012).
"The Economic Outlook: Global and Domestic Challenges to Growth." Williams, John C. (June 6, 2012). Speech Presented to the Seattle-Area Community Leaders, Bellevue, Washington.