Departures from labor force warp Fed’s job market measure

Bloomberg NewsMay 21, 2013 

— Tuba player Andrew Schwartz quit the Manhattan School of Music in 2011 when he saw opportunities shrinking and orchestras struggling. After a series of low-paid jobs such as selling stocks by phone, he left the workforce in August to pursue a master’s degree in business administration.

“The three letters M-B-A are going to be incredibly valuable to me,” said Schwartz, 26, whose undergraduate degree is in music. “I’m sure 99.9 percent of HR people throw my applications in the garbage and the other 0.1 percent laugh at me having a music degree.”

Schwartz is among millions of Americans whose departure from the labor force since the start of the last recession adds a layer of complexity to the Federal Reserve’s effort to attack unemployment by linking monetary policy to the jobless rate.

When people like Schwartz stop looking for work, the government no longer counts them as unemployed, which lowers the official jobless rate.

That means the Fed will need to look at other gauges of labor-market strength because the unemployment rate may send misleading signals of improvement long before payrolls start showing the substantial gains policy makers are seeking. Fed officials have pledged to keep the main interest rate near zero as long as unemployment remains above 6.5 percent.

“It complicates policy,” said Michael Feroli, chief U.S. economist at JPMorgan Chase in New York and a former Fed researcher in Washington. “The unemployment rate, as they’ve pointed out, may be the best single number for judging the health of the labor market, but it’s still imperfect, and those imperfections have grown because of the participation rate.”

Fed Chairman Ben Bernanke may be questioned about progress on stimulating job growth when he testifies Wednesday on the U.S. economic outlook before the Joint Economic Committee of Congress. The central bank’s Federal Open Market Committee will gather next on June 18-19 in Washington.

The unemployment rate dropped to a four-year low of 7.5 percent in April, with the labor force participation rate at 63.3 percent, the lowest level since May 1979, Labor Department data show. The participation rate measures those with jobs, or looking for work, as a percentage of the civilian U.S. population aged 16 and older.

Discouraged workers

The number of so-called discouraged workers who have given up on finding work stood at 835,000 in April, near the 861,000 average over the past year, Labor Department data show. Participation may remain depressed for years, San Francisco Fed researchers said last week.

Fed officials also say they must see substantial employment gains before they curb bond buying. Vice Chairman Janet Yellen has said the unemployment rate has limits as a policy guide.

Economists forecast unemployment will remain above the Fed’s threshold for at least a year beyond the expiration of Bernanke’s current term in January. The 59-year-old Fed chairman suggested in March he feels no personal responsibility to stay on, saying “I don’t think that I’m the only person in the world who can manage the exit.”

That job may fall to Yellen, 66, who was named most frequently as Bernanke’s probable successor in a quarterly poll conducted May 14 of investors, analysts and traders who are Bloomberg subscribers. She said in a March 4 speech that a decline in unemployment that reflects job-seekers exiting the workforce may understate “the actual degree of labor-market slack.”

While Fed research shows that the unemployment rate is the best indicator of labor market conditions, additional gauges such as payrolls and job loss and hiring should be taken into account to gauge what constitutes “substantial improvement” in the market, she said.

Unemployment gauge

San Francisco Fed President John Williams said last week the speed and magnitude of the participation rate’s drop over the past couple of years has been “striking.” Researchers are trying to decipher how much is because of a weak economy, which Fed policy can influence, and how much is the work of structural forces such as the retirement of millions in the post-World War II Baby Boom generation, he told reporters May 16 in Portland, Ore..

“A lot of these people” will “want to come back when jobs are available,” Williams said. “But there’s a lot of uncertainty about that.”

Even as unemployment declines, other gauges show U.S. workers remain distressed. The U.S. has only regained 6.2 million of the 8.7 million jobs lost after the recession began in December 2007. More than 4.35 million Americans have been out of work for six months or more, accounting for 37.4 percent of the jobless. Since the Labor Department began collecting monthly data in 1948, that share never exceeded 30 percent until after the 18-month recession ended in June 2009.

Marginally attached workers

A broader gauge of unemployment that includes marginally attached workers – those available for work who haven’t searched in a year and those forced to work part-time because of the sluggish economy – was 13.9 percent last month, near the same level as December 2008, during the longest and deepest U.S. economic contraction since the Great Depression of the 1930s.

Kai Kopp, 37, drives about 20 hours a week for ride-sharing services in the San Francisco Bay Area, along with making the occasional furniture delivery. He said he’s also washed dishes, delivered catering and worked as a theater stagehand, landscape photographer, and videotaped depositions, a role closer to his work toward a film production degree at San Francisco State University.

“I’ve never really said no to any job,” said Kopp, who has three children. “I don’t have a lot of work opportunity and then the work opportunity I do have, it doesn’t make enough.”

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