The following is a letter from the Chicago Federal Reserve analyzing the employment prospects in the U.S. over the coming decade.
For the unemployment rate to decline, the U.S. economy needs to generate above-trend job growth. We currently estimate trend employment growth to be around 80,000 jobs per month, and we expect it to decline over the remainder of the decade, due largely to changing labor force demographics and slower population growth.
The Federal Reserve has indicated it will maintain monetary policy accommodation until the labor market has made substantial improvement. Given that unemployment remains relatively high, a substantial improvement in the labor market will require well-above-trend job growth.
According to our analysis, job growth of more than about 80,000 jobs per month would put downward pressure on the unemployment rate, down significantly from 150,000 to 200,000 during the 1980s and 1990s. We expect this trend to fall to around 35,000 jobs per month from 2016 through the remainder of the decade. These estimates rely on several assumptions, notably about future labor force participation and immigration.
Therefore, we discuss several plausible alternative scenarios that would raise or lower our estimate of trend employment growth. Our baseline estimate of the payroll employment gap, i.e., the difference between actual payroll employment and our baseline estimate of trend employment growth, suggests that payroll employment was about 6 million jobs, or 4%, below trend in 2012. Closing this gap by 2016, for instance, would require payroll employment growth of about 195,000 per month on average over the next four years.
How do we measure trend employment growth?
We calculate trend payroll employment annually from 1987 through 2020 from the product of four estimated components: the trend labor force participation rate; the trend civilian noninstitutional population aged 16 and older; one minus the natural rate of unemployment; and the trend ratio of payroll to household survey employment. Trend payroll employment growth is the monthly average change implied by this constructed annual series.
The labor force participation rate captures the percentage of the civilian non-institutional population aged 16 and older that is employed or actively seeking employment. Our measure of the trend labor force participation rate is calculated from a series of statistical models that estimate the probability that an individual is in the labor force as a function of their gender, age, year of birth, race, education, and a few macroeconomic and institutional factors.1 The model is estimated using data from the 1987-2007 U.S. Bureau of Labor Statistics' (BLS) Current Population Survey and extrapolated through 2020.2
Figure 1, panel A plots our estimate of trend labor force participation against actual labor force participation since 1987. Growth in the trend rate during the late 1980s and 1990s reflects an increase in female labor force participation and the baby boomer generation reaching their prime working years. Since 2000, however, participation has been steadily declining. We forecast that trend will continue to decline by roughly 0.3 percentage points per year through at least 2020.
Both the historical data and projections for the civilian noninstitutional
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