Drop in U.S. Jobless Rate Sign of Demographic Shift
The drop in U.S. unemployment so far this year may be an early glimpse of what’s to come as the workforce ages.
The jobless rate, which was 9.4 percent in December 2010, declined to 8.6 percent last month, according to Labor Department data issued Dec. 2. The report also showed payrolls have climbed by 132,000 a month on average in 2011, around the pace most economists say would keep the rate stable as the population grows.
At play is a decline in the share of the working-age population, known as the participation rate, meaning that the economy needs to create fewer jobs to bring down unemployment. While some of the decrease has been caused by discouraged workers dropping out of the labor force, another driver is that the baby-boom generation is starting to move into retirement, according to economist Dean Maki.
“Demographic forces are the single biggest factor pushing the participation rate down,” said Maki, chief U.S. economist at Barclays Capital Inc. in New York and a former economist at the Federal Reserve. “This is a bit of a slow-moving drama but it’s likely to become more important in coming years.”
Stocks were little changed today amid concern Standard & Poor’s will downgrade debt issued by Europe’s bailout fund. The S&P 500 (SPX) Index fell 0.3 percent to 1,253.69 at 9:52 a.m. in New York. A report today showed the euro region economy expanded 0.2 percent in the third quarter from the previous three months and 1.4 percent from a year earlier.
Data in Germany today indicated Europe’s biggest economy may weather the sovereign-debt crisis. German factory orders surged 5.2 percent in October, the most in 19 months, the Economy Ministry in Berlin said today.
With the debt crisis hanging over the global economy, Australia executed its first back-to-back interest-rate cut since 2009 today.
Payrolls in the U.S. climbed by 120,000 workers in November after a 100,000 gain the prior month, last week’s jobs report showed. While hiring “will step up somewhat in 2012,” Maki said, even the current pace is enough to cause a “persistent decline” in unemployment over the long term. He projected the jobless rate will end 2012 at 8 percent.
Last month’s drop in the unemployment rate from October’s 9 percent reflected a 594,000 decrease in the number of people saying they were out of work. At the same time, the labor force shrank by 315,000, prompting a decrease in the participation rate to 64 percent from 64.2 percent.
The share of workers who are leaving the labor force because they are discouraged over job prospects may be shrinking, indicating more are departing for other reasons, including retirement.
Americans leaving the workforce after being unemployed as a share of all those saying they were not in the labor force peaked at 3.6 percent at the end of 2010, drifting down to as low as 3.1 percent in September. The number of discouraged workers was smaller in January than in the same month the prior year for the first time since August 2008.
The baby boom, the population bulge after World War II between 1946 and 1964, added 9.4 million people in the 16-24 age group during the 1960s and 7.3 million in the 1970s. Boomers started turning 65 this year, and every day for the next 18 years, about 10,000 more will hit the age that historically has been associated with retirement, according to the Pew Research Center in Washington.
The effect of the baby-boomer exit from the labor force will become more evident in the coming decade, Maki said. The policy implications may be more pressing, as Fed officials keep interest rates near record low levels for longer than may be required given the likely drop in the jobless rate. That may fuel price pressures in the economy, he said.
“It means there is less slack in the economy than is commonly perceived, and the slack will diminish more quickly than people think,” Maki said. As a result, “there are more inflationary risks with the very accommodative monetary policy we have now than one might believe.”
The non-accelerating inflation rate of unemployment, the equilibrium level of joblessness consistent with steady changes in prices, is about 7 percent and may be reached by the end of 2013, Maki predicts. The midpoint of the Fed’s long-term estimates issued last month puts the NAIRU at about 5.6 percent, a level that policy makers said won’t be reached during their forecast horizon through 2014.
“One outcome is that the unemployment rate will fall faster than most policy makers expect,” Maki said. “That suggests the debate over where the NAIRU lies will become relevant much sooner than many people believe.”
To be sure, the outlook for jobs may brighten as the economic expansion develops, drawing more people back into the workforce and limiting declines in unemployment. In addition, some economists argue that retiring baby boomers may not be the best explanation for the decrease already in train in the participation rate.
“Demographic trends are pushing down, over time, the normal labor force participation rate,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Nonetheless, he said, “the speed of the decline seen this year is in excess of what one would expect just given the demographic trend.”
Payrolls gains in the range of 100,000 to 125,000 in the coming year will, at best, stabilize the jobless rate, Feroli said. “In 10 to 20 years it will probably be a different story,” he said, as the exit of older Americans brings down the required number of payroll increases.
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