Chicago Fed Finds 80,000 Jobs Will Steady U.S. Unemployment

Payroll gains averaging 80,000 a month will be enough to keep the U.S. jobless rate steady over the next couple of years as aging baby boomers retire and population growth slows, according to research by economists at the Federal Reserve Bank of Chicago.

Those demographic trends will probably continue, pushing the figure down to about 35,000 jobs a month in the second half of this decade, the report said.

“These estimates are lower than the conventional wisdom that 100,000 to 150,000 jobs per month are needed to lower the unemployment rate,” Daniel Aaronson, director of microeconomic research at the Chicago Fed, and Scott Brave, a senior economist, wrote in a report dated July 2013 on the central bank’s website.

“This has ramifications for the potential speed at which the economy can grow in the future,” the researchers wrote.

Aaronson and Brave tracked four variables to arrive at their estimates: the labor force participation rate, population growth, the rate of unemployment that would be associated with a stable economy and the relationship between hiring as measured by the Labor Department’s household survey and changes in payrolls derived from its survey of employers.

The share of the working-age population that is either employed or actively seeking work, known as the participation rate, will drop by about 0.3 percentage point annually through at least 2020, according to their estimates. This reflects the retirement of the baby boom generation born after World War II.

Population Projections

The projections also use Census Bureau estimates that show population growth will slow from the current trend of about a 1 percent gain a year to about 0.8 percent by 2018, and stabilize thereafter.

The rate of unemployment that will keep inflation steady jumped to about 6.25 percent during the recession and has “gradually” declined since, according to the Chicago Fed economists. It will keep moving down as the economy improves to reach 5.25 percent in 2014, according to their projections.

Finally, Aaronson and Brave estimate that the relationship between employment in the household and establishment surveys will hold at its current level.

They said that one wild card that could increase job growth above the trend projection was immigration.


“It is plausible that immigration may increase more than the Census Bureau’s forecast as firms look abroad to make up for the declining labor force participation of domestic workers,” the researchers write, saying that if that happens trend employment could be boosted to 100,000 per month for the next two years and then 65,000 during the second half of the decade.

The researchers also provided estimates using the most optimistic and pessimistic scenarios. A smaller decline in labor force participation and a lower natural unemployment rate could also drive up trend employment and would mean it would take 120,000 jobs per month to steady unemployment over the second half of the decade, while the most pessimistic would mean no growth at all in payrolls will accomplish the same feat.

Above-trend job growth would be needed to close the current employment gap, the researchers found.

“Payroll employment was about 6 million jobs, or about 4 percent below trend in 2012,” the essay states, based on researchers’ baseline estimate. “Closing this gap by 2016, for instance, would require payroll employment growth of about 195,000 per month on average over the next four years.”

Fed Debate

The research comes at a time when the Federal Reserve’s policy making Federal Open Market Committee is debating whether to slow or maintain unprecedented monetary accommodation in the face of stubbornly high unemployment.

The FOMC has said it will buy $85 billion in bonds every month until the labor market outlook improves “substantially.” It has also pledged to keep interest rates near zero as long as unemployment remains above 6.5 percent and the outlook for inflation is less than 2.5 percent.

Unemployment stood at 7.5 percent in April, and economists in a Bloomberg survey project that the May figure, to be issued tomorrow, will be unchanged. The economy added 165,000 jobs in April and will show a similar increase for May, according to the Bloomberg survey median.

The study implies the economy can grow at a slower pace to reach its equilibrium level. The pace at which an economy can grow without stoking inflation, which economists term its speed limit, reflects the rate of growth of the labor force plus how much each worker can produce.

Productivity Focus

The study makes it “painfully clear that the reduced supply of labor will necessitate a faster rate of productivity to support above-trend growth in output and employment,” said Joe Brusuelas, a senior economist at Bloomberg LP in New York. “Accommodative monetary policy, eventual future rounds of fiscal stimulus and smart immigration reform will be required to support a faster pace of job growth.”

Chicago Fed President Charles Evans, 55, has been among the most vocal proponents of accommodative policy in recent years. He was an early supporter of the Fed’s third round of quantitative easing and was the first to advocate tying the zero-rate policy to economic indicators.

Evans said May 20 that he’d like to see employment gains of 200,000 or more for at least six months before judging the labor market substantially improved.

Fed presidents rotate voting on monetary policy with Evans voting this year. In 2011, he dissented twice from decisions of the FOMC at which policy was unchanged. Evans favored adding stimulus at those meetings.

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