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Shrinking U.S. Labor Force Keeps Unemployment Rate From Rising

Jan. 8 (Bloomberg) — An exodus of discouraged workers from the job market kept the U.S. unemployment rate from climbing above 10 percent in December, economists said.

Had the labor force not decreased by 661,000 last month, the jobless rate would have been 10.4 percent, say economists including David Rosenberg at Gluskin Sheff & Associates in Toronto and Harm Bandholz at UniCredit Research in New York.

“The actual unemployment rate is higher than shown by the official numbers,” Bandholz said.

About 1.7 million Americans opted out of the workforce from July through December, representing a 1.1 percent drop that marks the biggest six-month decrease since 1961, figures from the Labor Department showed today in Washington. The share of the population in the labor force last month fell to the lowest level in 24 years.

December’s 10 percent unemployment rate was unchanged from the previous month, matching the median forecast of economists surveyed by Bloomberg News. It was shy of the 26-year high of 10.1 percent reached two months earlier.

The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — rose to 17.3 percent in December from 17.2 percent, today’s report showed.

The number of discouraged workers, those not looking for work because they believe none is available, climbed to 929,000 last month, the most since records began in 1994.

Length of Unemployment

The backdrop to the disillusionment is that it’s taking longer and longer to find work, economists said. Workers were unemployed for 29.1 weeks on average last month, the most since records began in 1948.

“Longer-term unemployment is one of the biggest problems,” said Bandholz. “Payroll declines will come to a halt in the next couple of months, but the people who are unemployed are having problems getting a job and it’s getting tougher by the month.”

The U.S. unexpectedly lost another 85,000 jobs in December after revised figures showed payrolls climbed by 4,000 the month before, today’s report from the Labor Department showed. The November gain was the first since the economic slump began in December 2007.

“Workers seem to be particularly discouraged by this recession,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Participation Rate

The participation rate, or the share of the population in the labor force, fell to 64.6 percent in December, the lowest level since 1985, from 64.9 percent.

The labor force will probably grow this year as the economy continues to expand and Americans believe jobs will be easier to get. That will mean the unemployment rate will head higher because there won’t be enough jobs available to satisfy the demand for work.

“The exodus from the labor force can’t contain the unemployment rate indefinitely,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “We expect unemployment to resume rising over the next few months, peaking near 10.5 percent in the third quarter.”

Federal Reserve policy makers, while noting stabilization in the labor market, have expressed concern about unemployment and poor job prospects. That’s one reason policy makers will keep the benchmark interest rate near zero longer than most anticipate, said John Ryding.

Fed ‘On Hold’

“We continue to believe that the Fed will leave monetary policy on hold throughout 2010 in light of the high level of un- and under-utilized labor resources,” Ryding, chief economist at RDQ Economics in New York, said in a note to clients. The median forecast of economists surveyed by Bloomberg News last month projected the first rate increase would come in the third quarter of this year.

Treasury two-year notes today gained the most in three weeks following the worse-than-expected payroll numbers. The notes’ yields dropped below 1 percent.

President Barack Obama on Dec. 8 proposed additional spending on the nation’s transportation system, tax credits to spur hiring by small businesses and incentives to make homes more energy efficient in a second round of efforts to cut the jobless rate.

“We’re going to have to work harder to create jobs.” U.S. Labor Secretary Hilda Solis said in an interview today on Bloomberg Television. “This is a very stubborn recession.”

To contact the reporters on this story: Bob Willis in Washington bwillis@bloomberg.net; Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Charts courtesy of Karl Denninger.

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