Falling Unemployment Doesn’t Rate for Fed


The slack in the U.S. jobs market is getting taken in at a faster clip.

The Labor Department on Thursday reported the economy added 288,000 jobs in June. With upward revisions to April and May figures, there were 1.4 million jobs gained in the first half of 2014, the largest six-month increase since 2006. The unemployment rate fell to 6.1% from 6.3%.

If job gains continue at their pace so far this year and labor-force participation—the share of the population working or looking for work—stays constant, the unemployment rate would average 5.7% in the fourth quarter. That is well below the 6% to 6.1% that Federal Reserve policy makers have been projecting. By next June, the unemployment rate would fall to 5.1%.

The assumption that labor-force participation stays constant, however, is a big one. The participation rate has been stuck at a 36-year low of 62.8% for the past three months, well below the 66% it was before the recession. The decline in participation has led to a spirited debate over how many of the people who have left the labor force are merely cooling their heels until the job market improves, and how many, through factors including retirement, disability and deteriorating skills, are permanently out of the picture.

The fact that, despite the pickup in jobs growth, the participation rate has been low counts as an argument that many of the people who left the jobs market aren’t coming back. If that is right, then the unemployment rate will continue to fall quickly, and the Fed may have to start raising its target for overnight rates much sooner than either it or investors think. Federal-funds futures, which price off of expected overnight rates, imply the first rate increase will occur in the middle of next year.

Yet wage figures suggest employers aren’t struggling to find available workers. Average hourly earnings were up just 2% from a year ago, sticking to the pace that has prevailed for the past four years. Between that and the lack of movement in the participation rate, it is hard to tell exactly how much slack is really out there.

One clue may be found in unemployment levels among people who have never worked a job. There were 1.064 million of these so-called new entrants among the unemployed last month, according to the Labor Department. That was well below December’s 1.201 million, but compares to 679,000 before the recession. That these often-young job seekers seem to be having an easier time landing jobs suggests the job market is tightening. But that there are still so many of them unemployed suggests the job market is far from tight.

For the Fed, the pickup in the job market counts as a welcome development, but until there are a lot more people working, it is unlikely to start fretting about rates.

Write to Justin Lahart at [email protected]



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