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Friday, May 24, 2013

Labor Force Participation Rate Sensitivity

by Calculated Risk on 5/24/2013 09:25:00 PM

This morning I posted some comments from Michelle Meyer at Merrill Lynch on the likely path of the labor force participation rate. She wrote:

[W]e forecast the LFPR will slip slightly this year, but with a stronger recovery under way next year, the LFPR should start to level off some and potentially increase beginning in 2015.
The following table is an estimate of the unemployment rate in December 2013 and December 2014 assuming the LFPR stays close to the current level of 63.3% (I looked at 63.0%, 63.3% and 63.6%).  The current unemployment rate is 7.5%.

I also looked at three rates of payroll job growth, 167 thousand per month, 185 thousand per month and 200 thousand per month. I think it is possible that employment growth will pick up later this year, and if that happens, the unemployment rate will fall further in 2014.

Caveat: The payroll estimate is for the establishment survey, and the unemployment rate and participation rate are from the household survey - and this is just a rough estimate.

Looking at the table, the participation rate is very important for estimating the unemployment rate.  If the participation rate stays steady, the unemployment rate will probably be close to 7.1% in December at the current rate of payroll growth, and around 6.6% in December 2014.  If the participation rate dips further, the unemployment rate could fall below 7% this year and low 6%s at the end of 2014.

December 2013 Unemployment Rate
 Jobs added per month (000s)
Participation Rate167183200
December 2014 Unemployment Rate
 Jobs added per month (000s)
Participation Rate167183200