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Fewer Workers, Fewer Jobs

(November 15, 2006) We're entering an interesting phase. The statistics we've used to understand the world are changing. As they change, it will be important to keep track of their evolution.

This is another one of those "Everything you know is wrong" moments.

Throughout the Baby Boom Era, a declining Unemployment rate meant that the economy was growing. It took 150,000 new additional jobs each month to keep the Unemployment Rate steady. The growth of the workforce was a central component of the growth of the economy.

As we've been saying for years, fewer people are entering the workforce. Now, it only takes 2/3 as many jobs to keep the rate from changing. It's exactly like your speedometer has been shifted from "mph" to "kph" and nobody told you.

From Bloomberg:

Because fewer people are entering the labor force than in years past, smaller payroll gains are needed to keep the unemployment rate steady, economists said. That number is now about 130,000 per month, Fed Chairman Ben S. Bernanke said in testimony to Congress in July. ``Labor force growth isn't going to be as strong as it has been,'' the Fed's Lacker said.

From the Wall Street Journal

A rule of thumb on Wall Street is that it takes about 150,000 jobs a month to keep up with the growth in the labor force and thereby keep the unemployment rate steady. But the Fed's view is that "equilibrium" job growth is now only 110,000 per month.

Fed Governor Susan Bies, in a speech to Drake University in Des Moines, Iowa, Thursday night, said that the proportion of working-age people participating in the labor force, either working or seeking work, is declining. That's principally because more baby boomers are entering their mid- to-late-50s, when many take early retirement. Without that decline in the participation rate, equilibrium employment growth would be about 140,000 a month, she says. Chicago Fed President Michael Moskow said in an August speech that just 100,000 jobs a month represented equilibrium employment growth.

That suggests that what the street might see as a "weak" employment report may not ring alarm bells at the Fed, unless it's well below 100,000. Conversely, a number even moderately above the consensus of 125,000 would keep the central bank on the lookout for wage and cost pressures. But monthly payroll employment is highly volatile and heavily revised, so policy makers will probably pay more attention to the less volatile unemployment rate. If it holds steady or rises, a robust job number would be less of an inflation warning.

John Sumser © TwoColorHat. All Rights Reserved.
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