Long Term Perspective

Fostering sufficient economic growth to sustain a fully employed economy is one of the Fed's two mandates. Fed officials closely monitor several labor market indicators. The civilian unemployment rate can indicate tightness in the labor market, though economists and policy makers have long held the belief that the unemployment rate can give a misleading picture of the degree of labor market tightness because the supply of labor is not fixed. People are often not counted as part of the labor force when the economy is in recession because they simply give up job hunting. As a result, the unemployment rate often underestimates the true level of joblessness.

 

The labor force participation rate reflects the other side of the coin. When economic conditions are good, more people are willing to job hunt because landing a job becomes more likely. The labor force participation rate was high when the labor pool was at its lowest. The labor pool increased dramatically from 2002 to 2004 at the same time that the labor force participation rate plunged to 10-year lows.

 

Some of the changes in the labor force participation rate are due to changes in the demographic structure of the labor pool. For instance, baby boomers are in the 55+ group, a group that is generally associated with lower participation rates. It is unlikely that the entire drop in the labor force can be attributed to demographic changes, but some Fed officials believe that the problem with the labor force participation rate is structural, rather than cyclical in nature. This belief will play a role in their decision-making.

 

 

Short Term Perspective

The U.S. economic expansion has had only moderate employment gains, meaning that labor supply is relatively high while the labor force participation rate is low. However, more workers have become discouraged and left the labor force, reducing supply.