Will the rate of unemployment in the USA decline?

In economics, many measured variables inherit poor understanding of an economy as a system, which was developed in the past. Unemployment is one of the worst defined economic variables, which ignored the presence of a complete and closed (even if it is considered in many models as an open one) economic system. The rate of unemployment is defined as a share the labor force, i.e. as the percentage of people of the total available working force actively seeking jobs, but remain unhired. As an example, students are not available during scholar terms and can not be considered as unemployed despite they might think about some job position.
The inherent weakness of the unemployment definition roots in the fact that the labor force is a varying portion of the total working age population, as defined by all people of 16 years of age and over. (As mentioned above, this varying portion of the working age population is the denominator in the unemployment rate.) The portion is called labor force participation rate (LFPR). The presence of the varying basis in the definition of unemployment rate results in a strong bias in the interpretation of unemployment rate estimates by an unprofessional audience and even many researchers.
At first, labor force participation rate in developed countries varies in a wide range and thus the same portion of the total working age population announcing itself as " unemployed" may define quite different "unemployment rates" - compare Italy and Canada from Figure 1. Hence, before saying “unemployment rate is high” in a given country, one should mention relevant LFPR. Otherwise, the statement could be considered as an intentionally biased one.

Figure 1. The evolution of labor force participation rate in select developed countries.

Figure 1 also demonstrates that, when applied to one country, the definition of unemployment misses actual long-term variations in LFPR. These variations in participation rate are tremendous, as it has been actually observed in the USA since the 1960s. In 1963, the participation rate was below 58.7%, and between 1997 and 2000 it was 67.1%. The latter level was the peak and since 2000 the rate has been falling. As a result, during the 2000s people have been likely moving first into the unemployment “pot” and then out of the labor force at all. It is worth noting that the rate of unemployment in the US was low in the 2000s despite the decline in LFPR. In 2006, the rate was 66.2%, i.e. ~1 percentage point less than in 2000. One percent of the participation rate or 1% of the working age population comprises ~2,300,000 people leaving labor force, also through unemployment. I would like to stress that this is an observed (actual) process with some fundamental economic, social, demographic, and etc. forces behind it. As one can see, the effect of varying participation rate can not be neglected in the discussion of the current unemployment. When some disputants claim that the current rate of unemployment is high relative to that observed in the late 1960s, they put aside the fact that with the current labor force participation rate the labor force in the 1960s would be ~15,000,000 larger. This is a big question yet – could that more than a dozen million get some paid job when sought for it? On the contrary, with the participation rate observed in the 1960s (~60%), what all extra 20,000,000 people currently in the labor force would do? Would they comprise the unemployment? Then the rate of unemployment would be 20+%.
Figure 2. The evolution of unemployment rate in the USA between 1960 and 2007.

As a facultative part of this article, we present our model describing the evolution of labor force in developed countries. Skipping technical details and boring formulas, we provide couple illustrations borrowed from our article [1]. Figure 3 shows the evolution of observed and predicted LFPR in the United States. The latter is obtained directly from real GDP per capita. In other words, our model relates LFPR in developed countries solely to the evolution of real GDP. In the US, the rate of real GDP growth above the trend, which is defined in the model as the inverse value of the attained level of real GDP per capita, causes a decrease in the participation rate. When the rate of GDP growth is below the trend the LFPR is increasing. So to say, when the US economy is successful it does not need too many people to work. In poor years, more and more people must join the labor force in order to get incomes which would be obtained without work during the bright years.
The curves in Figure 3 almost coincide between 1960 and 2007. The largest deviations are observed in the years of biggest revisions to the LFPR after decennial censuses. Therefore, they can be neglected as having artificial character. The predicted curve shows that the LFPR should decrease after 2006 - the last year with the LFPR estimates available when the model was developed.

Figure 3. Observed and predicted LFP in the U.S. Notice the largest deviation between the curves is associated with the years of major revisions to the LFP - 1980 and 1990.

In order to predict the evolution of the LFPR we used projections of real GDP based on the projections of population. Figure 4 depicts the predicted and observed LFPR curves for the years between 2000 and 2014. In 2010, the rate should drop by approximately 1.3%. When translated into absolute numbers, it gives more than 2,500,000 people leaving the labor force in 2010 at once. Really, the wave of the boomer’s retirement has just started and it is likely that nobody will replace many of them in the labor force. Then the unemployment in 2010 will fall to its long-term level around 5%. The effect of the change in the LFPR is neglected by all researchers interpreting current level of unemployment. As a rule, nobody believes in a quick fall in the unemployment rate. Following our own model, we expect a dramatic decrease in unemployment in the near future.

Figure 4. Prediction of the LFPR evolution in the USA between 2000 and 2014 from the number of 3-year-olds. Flat segment between 2004 and 2009 will end up in a rapid drop by 1.3% after 2010. This is the effect of an elevated (above potential) real economic growth in 2010.

[1] Kitov, I., Kitov, O., (2008). The Driving Force of Labor Force Participation in Developed Countries, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. III(3(5)_Fall), pp. 203-222. http://www.jaes.reprograph.ro/articles/3_TheDrivingForceofLaborForceParticipationinDevelopedCountries.pdf

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