The jobless rate is falling, and that’s good news.
But it is declining for the wrong reasons, and that’s not good for a variety of reasons.
The rate has fallen significantly since the recession ended. It stood at 6.6 percent in January. The government released the February figures Friday, March 7.
The Federal Open Market Committee set a 6.5 percent unemployment rate as its target to start raising the federal funds rate. But recently, Fed said it also will consider “additional measures of labor market conditions” before raising the federal funds rate target.
The committee is downplaying the unemployment rate because it is falling for the wrong reasons.
The jobless rate is declining, in part, because people who can’t find jobs have stopped looking for work. These “discouraged workers” are no longer counted in the official unemployment rate.
An alternative measure of unemployment would count people currently not looking for work but would take a job if offered and they have looked for a job in the past 12 months. The alternative measure also would take into account those who are working part-time but would prefer full-time work.
Adding those into the definition and the unemployment soared to 12.7 percent in January.
The participation rate, which has been falling nationally, also points toward an increase in discouraged workers.
The percentage of people 16 years and older who are working fell from 66 percent when the recession started in December 2007 to 63 percent in January – a level not seen since 1978. In fact, if people were not discouraged and the participation rate still stood at 66 percent today, the official unemployment rate would be 10.9 percent.
Economists are debating whether the downward trend in participation rate is a lingering result of the severe recession that might be reversed when growth picks up.
Besides, there has been a larger percentage point drop in the participation rate among the relatively young population rather than the baby boomers. The drop in participation among people aged 15 to 24 appears to be happening, in part, because a larger percentage of that age group is staying in school than occurred prior to the recession.
Furthermore, more than 3.6 million people have been unemployed for 27 weeks or more – another statistic that points to weakness in the labor market. That figure represented 52.3 percent of the unemployment in January compared to 17.4 percent before the recession started.
Two groups that remain especially hard hit are those 16- to 19-year olds where the jobless rate is 20.7 percent.
The Fed’s shift away from the unemployment rate as a target for lifting its accommodative policy reflects what the man on the street still feels: the economy is not growing fast enough to generate strong job growth.
(This article first ran in the Richmond Times Dispatch)