The impact of changes in the participation rate on the unemployment rate

[ProSense]

The impact of changes in the participation rate on the unemployment rate

by CalculatedRisk

Yesterday Goldman Goldman Sachs economist Sven Jari Stehn argued that the labor force participation rate would remain "broadly flat at 63.7% through the end of 2013". He argued there would be a cyclical boost to the participation rate this year from the recovering economy, but a structural decline in the participation rate due to demographics. (Note: some decline in the participation rate has been expected over the next couple of decades).

The updated population controls from the 2010 Census showed a higher percentage of younger and older workers compared to the prime working age group (25 to 54), and also more women (participation rate is lower for women) than originally estimated - so the aggregate participation rate is now at 63.7%. Stehn argues that structural factors alone could push the aggregate participation rate down further to 63.1% by the end of 2012, but that this will probably be offset by more people returning to the labor force as the economy recovers.

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Below is a table showing the sensitivity of the unemployment rate to three levels of the participation rate (centered around Goldman's forecast) and three rates of job creation for 2012. (note: this is mixing two different surveys - the household survey for the participation rate and unemployment rate, and the establishment survey for payroll jobs. Over time these two surveys move together, but there can be significant variability in the short run).

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If the January pace of payroll employment growth continues (around 250 thousand jobs per month), and the participation rate stays at 63.7%, then the unemployment rate could fall to 7.3% in December 2012. But even at a slower pace of payroll growth, the unemployment rate could be at or below 8% by the end of the year - unless the participation rate rises or the economy slows sharply.

The recent FOMC projections (see below) are for the unemployment rate to be in the 8.2% to 8.5% range by Q4 2012, and perhaps the FOMC was expecting the participation rate to increase this year.

- more -

http://www.calculatedriskblog.com/2012/02/impact-of-changes-in-participation-rate.html

[ProSense]

1. Kick! n/t

[ProgressiveEconomist]

2. What really counts for the November 5th

election is the October unemployment rate, to be reported by the BLS at 830am on Friday, November 2 2012.

That will provide the last bit of new information to undecideds making up their minds during the weekend.

People voting early will do so on the basis of September 2012 unmployment numbers.

I wonder what the Goldman Sachs analysis predicts for September and October unemployment rates. IMO, as long as they're below 8 percent and still falling, President Obama will win re-election.

[ProSense]

3. The umeployment

rate is one thing, but the OP offers a detailed explanation and various scenarios showing the correlation between the three factors: labor participation, job creation and the umemployment rate.

Solid job creation will drive the rate down.