Unemployment rate would be higher, but for people having given up or retired

Bill McBride of the Calculated Risk blog explains why the participation rate — the percentage of Americans either working or actively seeking a job — is crucial in determining how far and how fast the unemployment rate drops.

The participation rate has dropped due to the economic problems of the last few years and currently stands at 64.2 percent. The norm prior to that was in the mid-66 percent range. The decline is a result of more people retiring, going on disability or simply giving up on finding a job. He notes that the number of people on Social Security Disability benefits has risen 14 percent since the recession began.

Some of the decline in the participation rate was inevitable over the next couple decades as the baby boomers began to retire, but demographers still expect the rate to go up some as the economy improves — and how far it goes up will help determine how fast the unemployment rate drops.

As I noted yesterday, if the Civilian noninstitutional population (over 16 years old) grows by about 2 million per year – and the participation rate stays flat – the economy will need to add about 100 thousand jobs per month to keep the unemployment rate steady at 8.9%.

If the population grows faster (say 2.5 million per year), and/or the participation rate rises, it could take significantly more jobs per month to hold the unemployment rate steady. As an example, if the working age population grows 2.5 million per year and the participation rate rises to 65% (from 64.2%) over the next two years, the economy will need to add 200 thousand jobs per month to hold the unemployment rate steady.

Of course, we need to do more than hold the unemployment rate steady where it currently is; we need to see that rate go down steadily. February’s jump of 192,000 jobs was a good start, but depending on what happens to the participation rate, it may not even be enough to maintain the current jobless rate.

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