People Not In Labor Force Soar To Record 91.8 Million; Participation Rate Plunges

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Curious why despite the huge miss in payrolls the unemployment rate tumbled from 7.0% to 6.7%? The reason is because in December the civilian labor force did what it usually does in the New Normal: it dropped from 155.3 million to 154.9 million, which means the labor participation rate just dropped to a fresh 35 year low, hitting levels not seen since 1978, at 62.8% down from 63.0%.

And the piece de resistance: Americans not in the labor force exploded higher by 535,000 to a new all time high 91.8 million.

The jobless, laborless recovery continues to steam on.

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[thenews]

GOLDMAN'S JAN HATZIUS: People Are Looking At The Wrong Unemployment Rate

The unemployment rate has fallen precipitously in the last three years.

In November 2010, 9.1% of America's workforce was counted as unemployed. In December 2013, the headline U-3 unemployment rate stood at 6.7%.

The U-6 unemployment rate, however, has not recovered so quickly, as Chart 1 illustrates.

According to the U.S. Bureau of Labor Statistics, this measure incorporates "total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force." And at 13.1%, it still remains highly elevated from pre-recession levels.

This U-6 measure of "underemployment" forms a key part of the reasoning behind the forecast offered by Goldman Sachs chief economist Jan Hatzius, who believes the Federal Reserve will refrain from hiking interest rates until early 2016, even though headline unemployment is falling rapidly.

In a note to clients, he lowers his forecast for the headline unemployment rate at the end of 2014 to 6.1% from 6.3%, but says U-6 will keep the possibility of premature monetary policy normalization at bay:

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[thenews]

The Fed's Obsession Over Labor Force Participation Could Be A Big Mistake

The Federal Reserve has kept its benchmark interest rate pinned near zero for more than five years in an attempt to repair the damages to the labor market caused by the recession.

Over the past two years, the unemployment rate has fallen faster than both Wall Street's and the Fed's own forecasts, and the latest 6.7% reading is hinting that the time for policy normalization is near.

The concurrent decline in labor force participation, however, has prompted many assertions that unemployment is falling "for the wrong reasons" — i.e., the unemployment rate is falling because unemployed Americans who can't find work are becoming discouraged and dropping out of the labor force.

This idea has had profound implications for Fed policy.

Fed officials have sought to de-emphasize the decline in the headline unemployment rate — previously considered a key input to policy decision — suggesting it does not reflect the true health of the labor market. This orientation toward the labor market is being used as a justification inside the Fed for continued extraordinary monetary stimulus.

Yet contrary to this popular narrative, the data suggest that the vast majority of the decline in labor force participation in recent years can be accounted for by the retirement of the "baby boomer" generation of American workers.

Consider the findings of a recent study by Shigeru Fujita, a senior economist at the Federal Reserve Bank of Philadelphia, titled "On the Causes of Declines in the Labor Force Participation Rate."

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