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Source: Luke Sharrett/Bloomberg/Getty

Unemployment Paradox

The Job Recovery's Invisibility Cloak

Why you should care

Because even an economist will tell you — they’re not so hot at seeing a job recovery until it’s actually happening. If you’ve been out of work or stuck in a dead-end job, there may be hope ahead.

Tea-leaf reading is far sketchier than economic forecasting, but at least you can brew a cup of tea after divining the future in leaf patterns.

’Discouraged workers’ returning to the labor force will mask a strong job-market recovery…

Economists predicting a robust U.S. expansion in 2014 also foresee a rare paradox. Consensus estimates project gross domestic product (GDP) will grow nearly 3 percent this year — not a breakout performance but a hearty gain. Yet the jobless rate, which stood at 6.6 percent in January, according to Friday’s monthly unemployment report, is expected to be little changed come the ringing in of 2015.

How can that be? Chalk it up to “discouraged workers” returning to the labor force, which is expected to mask a strong job-market recovery if one focuses solely on the unemployment rate.

“You shouldn’t mistake unemployment rate for job growth,” says David Berson, chief economist for Nationwide Insurance. “As the job market improves, many who dropped out will say ‘I really like that regular paycheck.’”

Adds Gus Faucher, senior economist PNC Financial Services Group: “As wages get bid up and employers are more willing to hire the long-term unemployed, we’re going to see those discouraged workers come back in.”

Misleading Statistics and How People Participate in the Labor Market

At first blush, it would seem 2013 was the breakout year for the job market. The U.S. unemployment rate fell to 6.7 percent in December, down from 7.9 percent at the start of the year. That was the fourth-biggest calendar-year percentage decline since 1948, eclipsed only by 1950, 1977 and 1983.

Only about a third of the decline was due to job creation, however. The other two-thirds came from a continuing drop in the number of Americans age 16 and older actively looking for work. As unemployed job seekers grew tired of fruitless searching and gave up looking, the “labor market participation rate” fell to 62.8 percent in December, its lowest level since 1978.

Color photo of people in line waiting to speak to someone regarding a job

Source: Corbis

Job seekers line up to meet a prospective employer at a career fair at a hotel in Dallas in January 2014.

As total employment grows, the long-term unemployed will be enticed back into the job market.

That comparative statistic itself paints a skewed picture. Remember that the year 1978 predates the demise of the single-income household and the ensuing influx of tens of millions of women into the job market in the 1980s. This shift vastly swelled the labor force. And after peaking at 67.3 percent in the year 2000, when unemployment fell to a 30-year low of 3.8 percent, the labor market participation rate kept declining.

It continued downward even during the 2001-to-2007 expansion. Why? Because baby boomers began retiring en masse.

What’s missing from the languishing unemployment-rate picture is the job growth that’s expected to occur in the year ahead. Berson projects that the economy will add an average of 210,000 nonfarm jobs monthly, compared with 182,000 a month last year and 183,000 in 2012. That puts total job growth for the year at 2.52 million, approaching the roughly 3 million jobs gained annually during the rapid expansion from 1997 through 1999.

As total employment grows, the long-term unemployed will be enticed back into the job market, Berson says. “The participation rate will edge up and keep the unemployment rate from falling, and may even push it up in some months.”

In its December job-market outlook for 2014, the Federal Reserve predicted the jobless rate would be 6.3 percent at the year’s end. Anticipating a continuing influx of long-sidelined workers, the Fed projects that the rate will drop just marginally further to 5.8 to 6.1 percent by the close of 2015, and 5.3 to 5.8 percent at the end of the following year.

“The unemployment rate is still higher than we want it to be, but the economy will be creating jobs at a decent clip,” Faucher says. “There should be more than enough to account for new entrants in the market, which is about 100,000 a month, coming out of school or coming back from childbearing or childrearing.”

The wild card in all the labor-force prognostications is the baby boom generation, between many who lost jobs in the downturn and those who gave up looking for work and retired early rather than return to the workforce.

“Are we going to see them all coming back in, or are many just going to stay out?” Faucher says. “It could be some of them are close to retirement age now, anyway, or there could be skills atrophy to the degree they won’t be able to get a job. It’s a real concern that what started out as cyclical unemployment could turn into structural unemployment.”

President Obama called on employers in his State of the Union address not to discriminate against job seekers who’ve been out of work for a prolonged period of time. Since job creation exceeded new entrants to the market throughout 2013, employers already have been drawing from the pool of long-term unemployed, which Berson sees becoming consistently shallower as the year progresses.

As for how much and how fast, Berson humorously acknowledges: “Economists aren’t bad [at forecasting] except at turning points, so they’re not bad except when it matters. I still think we’re better than the weather forecasters.…”

In other words, the U.S. job-market forecast for 2014 might be translated: “Sunny, with a chance of fog.”

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