Interest Rates and the Real Unemployment Rate
There’s nothing magic about a particular unemployment rate. No one number is enough to indicate that the economy is healthy.
Don’t be surprised if the U.S. unemployment rate hits 6.5% and the Federal Reserve still doesn’t start raising interest rates. Several Fed officials, including the current chairman, Ben Bernanke, and the incoming chairman, Janet Yellen, have suggested that a jobless rate that low would indicate that the economy was healthy enough to wean from today’s record-low interest rates. Months before it hit that level, the Fed would also have begun to taper off its massive bond buying campaign, gradually reversing its policy of quantitative easing. At its current pace of decline -- a 0.8 percentage point drop over eight months -- the unemployment rate would hit the presumed trigger at the end of 2014.
But the odds are it’ll be well into 2015 before the country’s monetary gurus are comfortable ratcheting up the federal funds rate—the rate at which banks borrow from one another or the Fed itself, effectively setting short-term rates for everyone. Why?
Because there’s a lot more to assessing the country’s unemployment situation than just the percentage of the labor force that is actively seeking a job but can’t find one. For starters, there’s the question of exactly who is in the labor force. The government’s definition—anyone who holds down a job or is actively seeking a job—ignores a sizable number of people. Every month, millions join the labor force: Young folks seeking their first jobs, new immigrants to the country, stay-at-home moms and dads who go back to work once their children reach school age and more. Nearly the same number drop out: New retirees, people who develop disabilities and can no longer work and, sadly, folks who want to work but have become so discouraged that they quit hunting for positions.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Since the end of the recession in June 2009, the number of people leaving the labor force has climbed significantly. As a result, the labor force participation rate—the share of the total population that is either working or looking for a job—dropped from 65.7% to 63.2% in September 2013. (An upward blip in both the unemployment rate and the labor force participation rate in October was a distortion wrought by the partial government shutdown that month.)
At least four out of every 10 who dropped out of the labor force from June 2009 to September 2013 were jobless and likely too discouraged to keep looking for work. The largest decline in the labor force participation rate over that 51-month period was for males ages 25 to 29, clearly not retirees eager to spend their golden years on the golf course. Once these folks stop looking for work, the government figures they’re no longer in the labor force, so they’re no longer counted as involuntarily unemployed. And the unemployment rate goes down.
Fortunately, there are other ways to help gauge what’s really going on. Take a look at the chart below. It shows employment as a share of the labor force in blue. It’s essentially the unemployment rate upside down—a 7% unemployment rate means a 93% employment rate. As you might expect, the blue line drops during the recessions of 2001 and 2008-2009, and it rises after the recessions. The red line, which tracks employment as a share of the civilian population ages 16 and up is in sync with the blue line through the economic expansion of the 1990s and during the recession-spurred declines. But the two lines diverge in the periods that follow the recessions when people leave the labor force. The employed as a share of the labor force rises, but as a share of population, not so much. The flat trend since 2009 indicates that employment is keeping pace with population growth but isn’t recovering to its prerecession share.
If discouraged job seekers don’t come back into the labor force anytime soon, the Fed can treat a 6.5% jobless rate as a signal that recovery is assured and stop goosing the economy with easy money. But if some or all of the disaffected workers do start hunting for jobs again, the declining jobless rate will reverse course. And the wise men and women of the Federal Reserve know that. So they’re unlikely to start withdrawing monetary policy props for the economy too swiftly, perhaps waiting to see some upward movement in the red line. It will probably be 2015 before short-term interest rates begin to rise.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
GM Stock Accelerates After Earnings Beat
General Motors beat expectations for the first quarter and raised its outlook for the year. Here's what you need to know.
By Joey Solitro Published
-
The Robots Are Coming... But Not For a While
The Kiplinger Letter There’s excitement in the tech sector over the potential of humanoid robots, but widespread adoption is likely to be years away.
By John Miley Published
-
Farmers Face Another Tough Year As Costs Continue to Climb: The Kiplinger Letter
The Kiplinger Letter Farm income is expected to decline for a second year, while costs continue to up-end farm profitability.
By Matthew Housiaux Published
-
H-1B Work Visa Rules Get a Revamp
The Kiplinger Letter H-1B visas allow employers to hire high-skilled foreign workers. Regulators have finalized new rules for this visa program following last fall's proposal.
By Matthew Housiaux Published
-
Woes Continue for Banking Sector: The Kiplinger Letter
The Kiplinger Letter Regional bank stocks were hammered recently after news of New York Community Bank’s big fourth-quarter loss.
By Rodrigo Sermeño Published
-
Are College Athletes Employees of Their Schools?: The Kiplinger Letter
The Kiplinger Letter A recent ruling has ramifications for labor relations and the unionization of student athletes.
By Sean Lengell Published
-
Salton Sea Clean Energy and Lithium Project Gets Approval: The Kiplinger Letter
The Kiplinger Letter California's Salton Sea is due to see the construction of a new lithium extraction and geothermal clean energy power plant.
By Matthew Housiaux Published
-
More Woes for Anheuser-Busch as a Strike Looms: The Kiplinger Letter
The Kiplinger Letter Drinkers of Anheuser-Busch beers may want to stock up soon. A looming strike threatens to shutter its U.S. breweries later this month.
By Sean Lengell Published
-
The Auto Industry Outlook for 2024
The Kiplinger Letter Here's what to expect in the auto industry this year. If you’re in the market for a car it won’t be quite as daunting as it was during the pandemic and after.
By David Payne Published