The pace at which teenagers, men in their prime and older workers re-enter the U.S. work force as the economy recovers will shape how quickly the unemployment rate falls, researchers at the San Francisco Federal Reserve said on Monday.
Workers exited the labor force in droves during the worst recession in decades, pushing the percentage of the 16-and-over population who have or are seeking jobs to 64.7 percent in August, down from 66 percent before the recession started.
As the United States recovers from recession, the cyclical response of labor force participation hinges on whether those who lost their jobs and left the labor force return, the researchers wrote in the latest San Francisco Fed Economic Letter. The higher the participation rate, the greater the number of jobs needed to keep the unemployment rate down.
Estimates of how many will return to the job market vary widely, generating vastly different views on the number of new jobs needed for the unemployment rate to drop, wrote Research Associate Joyce Kwok, San Francisco Fed Vice President Mary Daly and Senior Research Adviser Bart Hobijn.
Economists agree that a reduction in the jobless rate, which registered 9.6 percent in August, is central to the recovery. But they disagree on how many new jobs it will take to push it down.
The Social Security Administration, for instance, expects labor force participation to drop to 64.6 percent by 2012 as baby-boomers retire. For the jobless rate to fall to 8 percent by then, the economy would need to create about 208,000 jobs per month for the next 22 months, the San Francisco Fed researchers wrote.
But based on assumptions at the Bureau of Labor Statistics, which projects a rise in the labor force participation to 65.5 percent, the economy would need to create 294,000 jobs a month to reach the same result.
The behavior of teenagers age 16 to 19, men age 25 to 54 in their working prime, and workers age 55 and over are particularly difficult to predict, the researchers said.
Historically, labor force participation rates among teenagers and prime-age men fall during recessions and never recover to their pre-recession levels. But it is unclear whether those trends will stay in place this time, the researchers wrote.
Conversely, labor force participation rates among older workers are on the rise as more seek jobs to build assets or keep healthcare coverage until government-provided Medicare kicks in at 65, they wrote. Older people make up almost a third of the population.
Although it is very difficult to predict the magnitude of future increases in the labor force participation rate of older workers, it's something labor market experts must watch closely, the researchers wrote.
(Reporting by Ann Saphir; Editing by Dan Grebler)