Falling Unemployment Rates: the Bigger Picture

Jobs have been added and the unemployment rate has been falling.  This is all good and we hope for continued progress.  However, we should at the same time be mindful of the anomaly of fewer people being added to the workforce recently.  Every year an additional 3 million people live in this country.  Therefore, the workforce – those with jobs or those looking for work – rises in most years.  Having said that, we have experienced the abnormal phenomenon of seeing no increases in the workforce for four straight years.

Another way to view it is that the labor force participation rate has shrunk.  A normal rate over the past 20 years could be said to be around 66 to 67 percent of people over the age of 16 in the labor force.  It started to fall when the recession hit in late 2008 and is now at 64 percent.  During tough economic times, many people drop out of the labor force to go to school (anything from technical community to graduate schools).  The student debt load is surely piling on.  Some companies, in order to save costs, may have offered early retirement packages to a greater number of people.  Others may have simply given up looking for work since there is not much hope of finding what they’re looking for anyway.  These discouraged workers who have given up looking for work are no longer considered part of the workforce and they are not counted as unemployed even though they do not have a job.  To be officially counted as unemployed, a person must be searching for work.

It is a good thing that the economy is creating jobs now.  From the low point during the recent recession, 3.2 to 3.6 million jobs have been added depending upon whether one looks at household survey data or company payroll data.  However, this level of job creation after the harsh 8 million job losses during the downturn would not have yielded the current unemployment rate of 8.4 percent had the labor force participation rate not changed.

If the labor force were a more normal 66 percent (rather than 64 percent as it is now), and we combined it with the current job level, then the unemployment rate would be closer to 11 percent.

What will happen to the closely-watched unemployment rate in the upcoming months?  The discouraged workers who had stopped searching and were out of the labor force may renew their search for jobs in coming months.  Until their new job is found they will be counted towards the unemployment rate.  As a result, the unemployment rate could rise even as jobs are being created for the country, as people are encouraged to start their search again.  However, there are plenty of people who may decide instead to go to school or take early retirement, and those that do are not coming back to the workforce en masse any time soon.  So the likely scenario for the unemployment rate is that it will continue to fall for the remainder of the year.

What matters for the housing and the commercial real estate market is not the unemployment rate, but the actual number of people with jobs and earning income.  And that, as said above, has been more than a 3 million increase from the low point 3 years ago.  Demand for housing and commercial real estate, therefore, should be rising this year.

Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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