Fostering sufficient economic growth to sustain a fully employed economy is the Fed’s other key mandate. As a result, Fed officials also monitor several labor market indicators. The civilian unemployment rate can indicate tightness in the labor market. But economists and policy makers have long held the belief that the unemployment rate can give a misleading picture of the degree of labor market tightness because the supply of labor is not fixed. People are often not counted as part of the labor force when the economy is in recession because they simply give up job hunting. As a result, the unemployment rate often underestimates the true level of joblessness. In good economic periods, people are more likely to enter the labor force because they have more confidence they will find a job.
“Available labor supply” (16 years and over) is a broad measure that combines the two Bureau of Labor Statistics categories of "unemployed" and "those not in the labor force who report that they want a job now."
The labor force participation rate reflects the other side of the coin. When economic conditions are good, more people are willing to job hunt because landing a job becomes more likely. The labor force participation rate was high when the labor pool was at its lowest (over the past 10 years). The labor pool increased dramatically from 2002 to 2004 at the same time that the labor force participation rate had plunged to 10-year lows.
Some of the changes in the labor force participation rate are due to changes in the demographic structure of the labor pool. For instance, the first baby boomers are entering the 55+ group, a group that is generally associated with lower participation rates. It is unlikely that the entire drop in the labor force can be attributed to demographic changes, but some Fed officials due believe that the problem with the labor force participation rate is structural, rather than cyclical in nature. This belief will play a role in their decision-making.
The U.S. economic recovery began late in 2001 after a short recession. One would never know that the economic expansion was moderately healthy given that the labor force participation rate continued to decline over the past few years. The declining labor pool suggests that at least some workers are returning to the labor force.
The labor pool has seen lower levels, but whether or not this labor pool has a lot further to go is another question. A recent Fed study suggests that the current participation rate will not increase much further to reach the high levels of five years ago as a structural change in the labor market has decreased the supply of labor. This means that the current unemployment rate may be signaling a tight labor market – and this concerns Fed officials.
Recently, the available labor supply has partially reversed an earlier trend of declining labor supply growth. However, the labor force participation rate has slipped from recent highs.
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