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[IWS] CRS: RETURNING TO FULL EMPLOYMENT: WHAT DO THE INDICATORS TELL US? [15 April 2014]

IWS Documented News Service

_______________________________

Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

________________________________________________________________________

 

Congressional Research Service (CRS)

 

RETURNING TO FULL EMPLOYMENT: WHAT DO THE INDICATORS TELL US?

Marc Labonte, Specialist in Macroeconomic Policy

April 15, 2014

http://www.fas.org/sgp/crs/misc/R43476.pdf

[full-text, 18 pages]

 

Summary

Until recently, the economy and labor market were experiencing an unusually slow recovery from

the longest and deepest recession since the Great Depression compared to other expansions since

World War II. The rapid decline in the unemployment rate from 7.9% in January to 6.7% in

December 2013 (where it remained in the first quarter of 2014) would seem to indicate that the

labor market is returning to normal. The current unemployment rate is only 0.5 to 1.5 percentage

points higher than the consensus range of full employment.

 

Unusually, the unemployment rate may not currently be a good proxy for the overall state of the

labor market or economy. Some of the decline in the unemployment rate in 2013 is attributable to

a recovery in employment, but some is attributable to workers dropping out of the labor force.

The labor force participation rate has continued to fall during the recovery and is at its lowest

level since the 1970s. In fact, it has fallen more in the past five years than at any time since data

have been collected. Studies have identified multiple reasons for the decline. Some workers have

left the labor force because they have become discouraged and given up on seeking employment.

Others have left for reasons stemming from long-term trends that are unrelated to the recession,

such as age or enrollment in school or training. This trend could reverse—for example, more

workers returned to the labor force than found jobs in the first quarter of 2014, which prevented

the unemployment rate from falling.

 

Other evidence also points to more slack in the economy than the headline unemployment rate

suggests. Economic output and employment have grown since mid-2009 and 2010, respectively,

but at relatively sluggish rates. The long-term unemployment rate and youth unemployment rates

have fallen only modestly since the recession ended and are still at historically high levels.

Inflation has remained slightly lower than the Federal Reserve’s (Fed’s) goal of 2%.

 

These other economic indicators could be sending a misleading signal about significant slack in

the economy, however, if the economy’s potential capacity has been eroded by structural changes

or by the length and depth of the Great Recession. Cyclical deterioration in the U.S. labor market

is usually considered temporary—recessions are thought to have no lasting effect on overall

employment and unemployment rates. This recession could cause a departure from conventional

wisdom if labor market problems that started as cyclical persisted so long that they became

structural. For example, long-term unemployment could have caused workers’ skills to erode,

which would then prevent them from finding a job when the economy recovered.

 

Congress conducts fiscal policy and oversees the Fed’s implementation of monetary policy, the

two tools of macroeconomic stabilization. Policy makers are grappling with the transition from

the highly expansionary monetary and fiscal policy put in place during the Great Recession.

Many economists advocate reducing the budget deficit only when the economy is at or near full

employment. Likewise, the Fed has stated that it would begin to raise interest rates once the

economy is near full employment. If the economy remains far from full employment, then

declining unemployment would not yet call for a tightening of monetary and fiscal policy.

Alternatively, if lower unemployment is being driven by a cyclical upswing and the economy is

now closer to full employment than historical experience would predict, policy would likely need

to be tightened sooner in order to avoid rising inflation. It would also suggest that structural

policies (e.g., those that increase the incentives to hire, seek work, delay retirement, or train)

would be more effective at improving labor market conditions than counter-cyclical monetary and

fiscal policies.

 

Contents

Labor Market Conditions During the Great Recession and Current Recovery ............................... 1

Contraction and Recovery in the Labor Market as Measured by Unemployment and

Employment ........................................................................................................................... 1

The Labor Force Participation Rate Has Continued to Fall During the Recovery .................... 5

The Labor Market Experience of Selected Groups ................................................................... 9

Long-Term Unemployment ............................................................................................... 10

Youth Employment and Unemployment ........................................................................... 10

Alternative Measurements of Labor Underutilization ....................................................... 10

A Rising Natural Rate of Unemployment? .................................................................................... 11

Macroeconomic Policy Implications ............................................................................................. 12

 

Figures

Figure 1. Average Monthly Employment Growth ........................................................................... 3

Figure 2. Unemployment and Labor Force Participation ................................................................ 5

 

Tables

Table 1. Studies Explaining the Decline in the Labor Force Participation Rate .............................. 7

 

Contacts

Author Contact Information........................................................................................................... 15

 

 

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This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

 

 




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