Hurdle for Declining Unemployment as Participation Steadies

The labor-force participation rate is starting to stabilize, putting the onus on hiring to push down joblessness in the U.S.

The share of Americans employed or looking for work rose to 62.9 percent in July, Labor Department data showed today. The increase helped push up the unemployment rate to 6.2 percent from 6.1 percent in June as some applicants failed to land a job. Over the past nine months, participation has gained 0.1 percentage point, the best performance over a similar period since 2008.

The decline in the participation rate, which is still close to a 36-year low of 62.8 percent, became more pronounced after the last recession as the unemployed gave up on the workforce or decided to retire. Halting the slide will depend on a pickup in the number of job-seekers, meaning faster hiring would be needed to keep the jobless rate falling at the same pace.

“We’ve been thinking for a while now that 2014 should be the year when the labor-force participation rate levels off and may even start to increase slightly,” said Robert Stein, deputy chief economist at First Trust Portfolios LP in Wheaton, Illinois. That means “we would need faster growth in the year ahead to bring down the unemployment rate compared to the past year.”

A stable or rising participation rate is a positive economic signal: It means people believe jobs are plentiful enough to make diving back into the search worthwhile.

‘Good Thing’

“The labor force rises typically when people are feeling better about the backdrop,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York. “As the economy and the labor market really do improve in earnest, the unemployment rate will start to rise, which perversely will be a good thing.”

Some economists say it’s too early to determine whether the labor force will continue to expand.

“Let’s wait a few more months before we declare victory that participation is turning around,” said Guy Berger, U.S. economist at RBS Securities Inc. in Stamford, Connecticut, noting that gains in the past have reversed. “It’s really too early to tell.”

While more employment opportunities draw in discouraged workers and boost labor force participation, demographics will pull the rate in the opposite direction.

Boomers Retire

“We expect a relatively flat trend in the coming months as some discouraged workers reenter the labor force, but are roughly offset by further retirements among the baby boomers,” Dean Maki, chief U.S. economist at Barclays PLC in New York, wrote in a note to clients.

If better participation slows the jobless rate’s descent, it would be welcome news for Federal Reserve policy makers. Unemployment has fallen from 7.3 percent a year ago and 10 percent shortly after the end of the last recession in 2009.

The swift drop has prompted the Fed to de-emphasize the figure as it tries to gauge strength in the labor market to determine when to raise interest rates.

Fed Chair Janet Yellen is “probably happy the unemployment rate ticked up a little bit” in July, Stein said. “It gives them more breathing room on raising interest rates. I’m not saying she’s happy about more unemployment, but I think she believes the unemployment rate was artificially good compared to other labor-market indicators.”

Forecasting Model

Unemployment will linger at 6.2 percent before settling at 6.1 percent at the end of the year, according to a model promoted by the Brookings Institution that uses the number of workers flowing into and out of unemployment.

Regis Barnichon of the Barcelona Graduate School of Economics and Christopher Nekarda at the Fed’s Board of Governors, who developed the model, say it outperforms Fed and private forecasters.

“All of this suggests that there’s no great rush for the Fed to renormalize monetary policy,” said Justin Wolfers, a senior fellow in economic studies at Brookings in Washington. “A slightly more dovish policy makes sense given what seems to be the best forecast of the future of the unemployment rate.”

Even so, it’s not a certainty that rising or stable participation will result in an increase in the unemployment rate. Hiring has been robust enough to keep joblessness falling even if the labor supply holds steady, said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York.

“We’re still going to see the unemployment rate go down,” said Dutta, who noted that participation is up 0.1 percentage point this year, and the unemployment rate has declined 0.5 point over the same period. “If you’re getting over 200,000 a month, it’s only really a matter of time” before Fed policy makers raise interest rates from record lows, Dutta said.

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