Labor markets are weaker than they appear, leading the Fed toward
continued accommodative monetary policy. Still, the central bank may
find that weakness difficult to overcome, as much of it stems from
serious long-term issues and not merely short-term lack of demand.
In recent posts, my colleague Russ Koesterich outlined why the U.S. labor market recovery will continue to frustrate the Fed,
and Jeff Rosenberg examined one key reason why the central bank is set
to keep rates low for some time. I agree with these points, and want to
step back and talk about some of the long-term structural headwinds that
labor markets face today.
First, let’s take a look at the
official statistics. While headline unemployment has been declining for
the last three years, looking at the official unemployment rate as a
signpost for the overall health of labor markets is highly misleading.
Indeed, both investors and the Fed itself are increasingly focusing on a
broader array of labor market metrics. Chiefly, and unfortunately, much
of the decline in the unemployment rate can be attributed to the fact
that more and more people are dropping out of the labor force (shown in
the chart below via the decline in the participation rate).
That is hardly the sign of a thriving employment environment.
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