We all remember in December 2012 when the Federal Reserve announced its QE-4-Ever mission in order to foster the employment sector which was still weak compare to the pre-crisis levels. At that time, the unemployment rate was standing at 7.7%, and policymakers’ target was 6.5%.
We saw on Friday that the jobless rate in the US printed at 6.7% in December, down from 7.0% the previous month despite a poor Non-Farm Payrolls rise of 74,000 (well below expectations of 195K). The question is now: Is the employment sector really recovering?
We wouldn’t say so as if you have a quick look at the chart below (Source: FRED), we can see that the labour force participation rate* in the US has declined drastically since 2008 by 3.3%. It dropped a 35-year low of 62.8%, and the number of Americans not in the labour force hit a new all-time high of 91.80 million.
Hence, if we take into account the labour force participation rate, the ‘real’ unemployment rate in the US would be 10.0% instead of 6.7%. Even Ben Bernanke, at that time chairman of the Fed, stated in a conference last summer that the ‘unemployment rate probably understates the weakness of the labour market’.
*Quick review on how the participation rate is calculated
According to the BLS, Labour force participation rate (%) is equal to:
(Civilian Labour Force / Total Non-institutionalized Civilian Population) multiplied by 100
First, Civilian Labour force is a group that consists of people who are actually classified as being either employed or unemployed. In order to be qualified as an unemployed person, you have to be looking currently for a job. Therefore, a housewife, a student and an early retired person are not considered to be employed or unemployed (On the website http://www.bls.gov/cps/cps_htgm.htm, you can see who is counted as employed and unemployed by the BLS).
Second, Total Non-institutionalized Civilian Population are the total population of the US (311 Mio) minus a few key groups that include children and teenagers under the age of 16 years old, people in prisons or in other institutions and military personnel.