Fed Worries about “Fewer People Looking for Work”
February 16, 2011
David R. Kotok


“Following the loss of about 8-3/4 million jobs from 2008 through 2009, private-sector employment expanded by a little more than 1 million in 2010. However, this gain was barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly erode the wide margin of slack that remains in our labor market. Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms’ hiring plans, do provide some grounds for optimism on the employment front. Even so, with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”
–Ben Bernanke


Fed Chairman Bernanke used his Feb. 9 congressional testimony to reiterate the Fed’s view about the sustainability of the economic recovery. Bernanke’s key point is that we need to see the jobs before we change the policy. Will we?

NY Fed president Bill Dudley embellished this concern in his Feb. 14 briefing. Remember Dudley is vice-chair of the FOMC and, as NY Fed president, the only regional bank president with permanent voting status. He was clear in his message.

“On the labor front, the most recent employment report for January 2011 is quite difficult to interpret. Only 36,000 nonfarm payroll jobs were added, well below expectations. Yet, we get a very different perspective from the unemployment rate, which fell by 0.4 percentage points for the second month in a row and now stands at 9.0 percent. Job growth was undoubtedly held down by the severe winter storms that affected many major cities, including our own. The decline in the jobless rate was not an unmitigated positive, as a significant part of this decline was due to fewer people looking for work.”

We agree with Dudley’s perception. In our view, it is way too soon to celebrate job recovery. The unemployment rate has dropped to 9% from a 10.1% high in October, 2009. Normally, that would be cause for celebration. However, that may not be the casein this cycle.

Let’s talk about the “fewer people looking for work.”

The drop of over a point in the unemployment rate occurred, in part, because the labor force participation rate is falling, as it has been for years. The number of folks looking for work keeps declining. It appears that the number of unemployed who have given up can be measured in the millions. The latest estimate of the participation rate is 64.2%, the lowest in a quarter century. For contrast, the labor force participation rate peaked at about 67% nearly 12 years ago.

The implications for labor income and for Fed policy are profound. The Fed has made job recovery one of its key objectives. That said, the Fed forecasts the unemployment rate and not total employment. Their target is a 7% unemployment rate, to be reached by 2013.

Nell Soss and Henry Mo (Credit Suisse) took the Fed’s target and adjusted it for changes in the participation rate. The results are dramatic. Remember, the lower the participation rate, the more it seems that the unemployment rate is declining. Dropouts are not counted as looking for jobs and the official unemployment rate counts only those who are looking for work and have not found it.

Soss and Mo projected economic outcomes using the current participation rate of 64.2% and another scenario using an improved 65.2%. The shift of 1% in the participation rate means 2.4 million jobs at the end of 2013. In other words, the Fed could see their estimated 7% targeted unemployment rate reached in a very tepid recovery if the participation rate remains low. Alternatively, the Fed could point to a successful policy outcome if the participation rate rises. The difference means a lot.

The Fed minutes released today describe the FOMC’s latest forecast as follows:

”Although participants generally expected further declines in the unemployment rate over the subsequent two years—to a central tendency of 6.8 to 7.2 percent at the end of 2013—they anticipated that, at the end of that period, unemployment would remain noticeably higher than their estimates of the longer-run rate. Many participants thought that, with appropriate monetary policy and in the absence of further shocks, the unemployment rate would continue to converge gradually toward its longer-run rate within five to six years, but a number of participants indicated that the convergence process would likely be more extended.”

So what happens if we have fewer people looking for work?

A higher participation rate generates more income for workers. It yields more tax revenues to the federal as well as state and local governments. It stimulates more housing and adds to purchasing power of consumers.

A lower participation rate means the job recovery engines of the US economy remain rusted. It means slow growth in consumer income. It means weaker housing and worsening budgets at all levels of government.

So far, in this recovery, we see the latter. That means inflation pressures from labor are muted. This has big implications for markets that are discounting heavy future inflation pressures. We may not see the inflation everyone fears.

Neil Soss ends his essay with this note: “The Fed should count jobs, not unemployment.” We agree. Furthermore, the shrinkage of the state and local government sector means that the US needs nearly 200,000 net new jobs a month to keep the true unemployment rate constant. More are needed to lower it and that only works well when more people are looking for work and not fewer.

We are not sanguine about the jobs outlook. We expect a low labor force participation rate; perhaps, it will keep falling. That will encourage the Fed to keep the policy interest rates near zero for the rest of this year and well into next year.


David R. Kotok, Chairman and Chief Investment Officer

Category: Federal Reserve, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “Fed Worries about “Fewer People Looking for Work””

  1. jeff in indy says:

    and we’re looking for and taking cash jobs… beats sitting on your hands all day (or trolling the web, whichever the case may be).

  2. Mikausa says:

    It takes Uncle Sam about 3-4 days to calculate your withholding tax, and that’s about as long as it takes to calculate one variable of unemployment. Anyone who doesn’t have a W-2 form probably has a small business with an EIN number. Outside of that, 1099.

    The calculation is simply a COMPARISON: your $ in 2010 compared to any previous year, back to 2001 or beyond. It’s a comparison operation. If $ in 2001 is Less Than $ in 2010, print name, address, and social security number. We’re not even talking about arithmetic. Last time I looked, computers were well equipped, to handle by state, a comparison operation.

    Or you could have people who no longer collect UI drop by their uneployment office and state what their job search has involved since $ 2001 < $ 2010. Now, whether Ben wants to be embarrassed by computers performing simple dollar sign comparison operations, but bet he doesn't. Otherwise, he could conduct this survey on his own Fed web site. LOL

  3. ashpelham2 says:

    I see the lowering of the participation rate as being somewhat expected, or at least it should have been.

    I mean, the largest generation of people in the history of this country is retiring now, and taking their need for a job and a need for income, and a need for spending at high levels, with them. In other words, the country has reached a growth climax. The growth that we now have is largely centered from immigration and from that HIGH birth rate. But these are lower to middle income folks, largely, and so demand remains tepid. And so does the amount of skilled labor that is going to be available. Still, the jobs that they COULD do are being outsourced at a greater rate than they can fill them.

    It’s a tough spot to be in. I don’t see it so much as something that can be reversed; rather, I see it as something that we should have expected. And, America has to adjust it’s future plans and it’s expectations to work with this new reality. America still has a bright future, but a different magnitude or brightness.

  4. SivBum says:

    Many boomers are retiring at a rate of 200K a month. It has been going on since Jan 2009 when the first boomer turned 62:

    “…More people filed for Social Security in 2009 — 2.74 million — than any year in history, and there was a marked increase in the number receiving reduced benefits because they filed ahead of their full retirement age. The increase came as the full Social Security retirement age rose last year from 65 to 66…”


  5. ricecake says:

    You will stop looking too after go to compete with other hundreds people for one job opening.

    It’s called hopeless.

  6. gethoht says:

    The FED isn’t really worried about fewer people looking for work, it’s their policies that have directly contributed to the lack of participation(Zero Interest Rates, QE, QE2 Etc…. When you full incentivize a fraudulent economy that is NOT based on production (The financial system is HOW MUCH of GDP?) then what’s the point in participating in a system that is stacked against you. Why work when all your productive labor gets exploited by an ever decreasing percentage of uber rich? There’s no really no point in it besides some made up or shell of a dream of what it means to be a productive member of society.

  7. Francois says:

    Fed worries about jobs?

    I guess they finally woke up to the implications of the 2nd graph of this post:


    Truly embarrassing; and the excuses mounted at trying to explain it away were even more embarrassing.

  8. rip says:

    Oh, the definition of insanity is … . So the Fed is going to keep it up until the job market improves.

    Lots of luck with that one.

    But a lot more citizen money will wind up in fewer hands (spelled elite).