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  • SF Fed: Impact of Discouraged Workers Rejoining Labor Force on Unemployment Rate

    Take a look at the trend line for the percentage of Americans who are not currently looking for work but who want jobs, from a new Economic Letter by San Francisco Fed researchers Mary Daly , Early Elias , Bart Hobijn , and Òscar Jorda : There is a clear growth of what the Bureau of Labor Statistics terms "discouraged workers" since the recession. These workers do not count against the unemployment rate. So as we get set to begin another year of watching monthly job reports closely, we need to be aware of how a positive trend of these Americans returning to the workforce will affect the unemployment rate. Nearly 6.9 million people report being out of the labor force but wanting a job. As economic conditions improve, it is reasonable to expect that some of these workers will move back into the labor force or join for the first time. Based on historical averages, about 2.1 million of them could enter the job market. These potential entrants will either take jobs directly or join the labor force as unemployed workers actively searching for jobs. The near-term path of unemployment will reflect both how quickly potential workers enter the labor force and the rate at which jobs are created. Assume that the average pace of job creation over the past two years continues. We can then project the path of the unemployment rate over the next year according to the rate at which the 2.1 million potential workers enter the labor force. If these workers take a year and a half to join the labor force, which would be about a year faster than the entry rate from 1994 to 1999, the recent decline in the unemployment rate would stall at more than 8% by the end of next year. Suppose though that the number of workers who want a job but are not actively looking falls at a more moderate pace and it takes three-and-a-half years for this group to join the labor force. In that case, the unemployment rate would stay at 7.7% through the end of next year. For comparison, if none of the 2.1 million potential workers were to enter the labor market, the unemployment rate would fall to 7.4% by the end of 2013. Of course, the rate at which these workers join the labor force may reflect the labor market’s overall strength. A faster rate of job creation may offset a faster rate of labor force entry, allowing the unemployment rate to fall. Read Will the Jobless Rate Drop Take a Break? here .

  • SF Fed Economic Letter: Wage Rigidity and Wage Growth

    In a new Economic Letter , San Francisco Fed economists Mary Daly , Bart Hobjin , and Brian Lucking take a look at wage growth. Wage growth has been strong compared to the overall rate of recovery and growth of GDP in the US. So what is to explain this growth? Daly, Hobjin, and Lucking provide one quick answer: One reason real wage growth has been so solid is that inflation has been low, with the personal consumption expenditures price index increasing at an average annual rate of 1.8% since the start of 2008. Low inflation means that employers cannot reduce real wages simply by letting inflation erode the value of worker pay. Instead, if they want to reduce real labor costs, they must cut the actual dollar value of wages. Employers generally avoid doing so because cuts to nominal wages can reduce morale and prompt resistance even in difficult economic times (Kahneman, Knetsch, and Thaler 1986). The inability or unwillingness of employers to reduce nominal pay is known as downward wage rigidity. When economic conditions are poor, this rigidity can disrupt normal labor market functioning, especially in a low-inflation environment. If wages are downwardly rigid, workers may receive false signals about the value of remaining in a particular occupation or industry. For example, consider construction workers who are less productive now than they were five years ago because of the bursting of the housing bubble. If their wages fell, they might seek jobs in other industries. Because of downward wage rigidity, they may stay in construction instead. On the labor demand side, employers that can’t cut wages may delay expanding payrolls as conditions improve. Either way, downward nominal wage rigidities can result in misallocation of resources in the economy. Read Why Has Wage Growth Stayed Strong? here .

  • SF Fed's 'Economic In Person' Series: The Great Recession and Unemployment

    One key legacy of the Great Recession will be the damage it caused to the labor market, says Mary Daly . That damage is deep and wide. And it only just begins to show up in the stats discussed in the media. In the first installment of a new series from the Federal Reserve Bank of San Francisco , Daly--Associate Director of Research and Group Vice President at the bank--discusses four distinguishing characteristics of the recession and its impact on unemployment. frbsf on livestream.com. Broadcast Live Free