The State of the Labor Market

The U.S. unemployment rate is now low by historical standards. Is this because the economy is operating near capacity or because so many workers are discouraged that they have given up looking for a job? The Fed staff has an answer. Here is an excerpt from an article in today's Wall Street Journal.

Fed Analysts Say Low Jobless Rate Doesn't Mask Labor Market Woes

U.S. unemployment really is low and the jobless rate hasn't been artificially depressed by a failure of many discouraged workers to be counted as unemployed, Federal Reserve researchers say....

The study wades into a controversy over the failure of more people to seek work since the recession ended in 2001. The "participation rate" -- the proportion of working-age people working or looking for work -- peaked at 67.3% in 2000, fell to 65.8% in March 2005, and has since recovered to 66.1%, below where it stood for most of the 1990s.

Some economists argue the low participation rate means many people aren't seeking work because they believe no desirable work is available and aren't counted as unemployed....The latest Fed report disagrees.

"The low level of the participation rate is not artificially masking the extent of unemployment," said the study by Fed staff economists Stephanie Aaronson, Bruce Fallick, Andrew Figura, Jonathan Pingle and William Wascher.

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The labor-force participation rate may well continue to trend downward over the coming decade, as the baby-boom generation starts to retire in greater numbers.

Update: You can find the Fed study here.