Labor Force Participation rates in the U.S. have been declining for 13 years and the rate of the decline has accelerated since 2008. The sole reason for the decline in the rate of unemployment since 2008, as measured by U3, is because more people are leaving the work force than are entering it.
On the current trajectory, another 5 million-6 million people will be accounted for as having left the labor force over the next five years or so. This will cause the unemployment rate to decline to about 4% but it will also cause the participation rate to decline to about 59%. Will the 4% unemployment rate be considered the result of successful monetary and fiscal stimulus or will the 59% rate be indicative of failure?
This trajectory is well documented and it has occurred as the Fed has increased its balance sheet from about $800 billion to about $3 trillion. Meanwhile, the federal government has borrowed and spent about $1 trillion a year more than it is taking in tax receipts for the past six years. In addition, one of the current considerations among bond and equity traders as well as financial market pundits is whether the Federal Reserve will lower its target unemployment rate from 6.5% to 6%.
Commensurate with this concern is that perhaps the Fed will increase its target rate for inflation from 2% to 2.5%, as it has said it would tolerate until the 6.5% unemployment rate is achieved. The implication for both is that if these adjustments are made it will impact whether or not the Fed will extend its large-scale asset purchases. This in turn would impact treasury yields and the commercial loan rates tied to them.
The entire discussion is absurd, outside of immediate financial market pricing, as it places form before function and is detached from anything in the real economy. There is nothing in the Fed's mandate about unemployment; it states "...so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."
Unemployment is not a proxy for employment and to have the entire financial infrastructure focused on it as a means of determining public financial policies, economic viability, and capital markets potential is again absurd. The unemployment rate in Japan is about 3.4% and the participation rate is about 58%. Both are falling -- even as the Japanese have been embarking on ever larger public stimulus measures.
They don't consider these levels to be indicative of a positive economic trajectory, so why do the financial pundits in the U.S. think that the same trajectory is somehow indicative of policy success in the U.S.? Further, if the trajectory for both in the U.S. remains in force, the most logical monetary policy response will be for the Fed to increase quantitative easing as has been the case in Japan. Yet the financial markets in the U.S. continue to reflect expectations of the opposite.
Looking at it from another angle, if the people who have left the labor force over the past five years were instead counted as still in it the U3 unemployment rate would be 11% today. If the real experience of the last six years is repeated over the next six years, the real unemployment rate in the U.S. will be at the levels of the depression of the 1930s. And yet, as noted above, the official rates will indicate the opposite.
From another vantage point, the number of people employed in the civilian work place in the U.S. has increased by about 2 million in the past two years while payroll tax receipts have not increased. This is an empirical indication of the shift away from full-time work to part-time work and a net reduction in per capita incomes as well.
The U.S. economy is experiencing a real structural problem and it is not responding to the counter-cyclical fiscal and monetary interventions. Meanwhile, both public and private sector financial policy makers are exhibiting not just what may be described as conscious obtuseness but claiming the exact opposite is happening.
I don't know why this is happening, but when the financial economy breaks from the real economy and both are going in opposite directions for years, bubbles in financial assets form that can only be corrected by the financial economy reverting to meet the real economy.