second half of the decade, roughly where it stood in 2012. Likewise, the most
pessimistic assumptions would result in little or no growth in trend employment
growth, on average, over the same period. We view 20,000-50,000 jobs per month,
on average, to be a reasonable range and about 35,000 per month to be a
We estimate that, currently, employment growth above about 80,000 jobs per month would put downward pressure on the unemployment rate. Likewise, anything short of this benchmark would push the unemployment rate up. These estimates are lower than the conventional wisdom that 100,000 to 150,000 jobs per month are needed to lower the unemployment rate. Moreover, we expect trend employment growth to decline over the coming years, such that even our most optimistic scenarios for labor force participation and immigration fall at or below today's conventional wisdom.
That said, employment growth has been well short of trend since 2008, opening up a large gap between trend and actual payroll employment. We expect this gap to slowly narrow as a result of above-trend growth in economic activity over the next few years. For instance, average job gains of about 240,000, 195,000, or 165,000 per month over the next three, four, or five years would close the gap. When economic activity finally stabilizes at its trend, our estimates suggest that employment growth, and consequently growth in the number of total hours worked, will be slower than in the past. This has ramifications for the potential speed at which the economy can grow in the future.
1 For details, see Daniel Aaronson and Daniel Sullivan, 2001, "Growth in worker quality," Economic Perspectives, Federal Reserve Bank of Chicago, Vol. 25, Fourth Quarter, pp. 53-74, and Daniel Aaronson, Jonathan Davis, and Luojia Hu, 2012, "Explaining the decline in the U.S. labor force participation rate," Chicago Fed Letter, Federal Reserve Bank of Chicago, No. 296, March.
2 The model is estimated on the population of 16-79 year olds. We convert the trend participation rate for this population to the population aged 16 and older using a cyclically adjusted measure of the ratio of labor force participation rates for the population segments aged 16-79 years old and 16 and older.
3 We use projected growth rates for the resident population aged 16 and older from the Census Bureau. While the growth rates of the resident and civilian noninstitutional population series can differ from year to year, on average, since 1960 these differences have been minor.
4 We use the Hodrick-Prescott (HP) filter to isolate the trend in population from 1987 to 2020. To avoid the standard end-of-sample problem with the HP filter and because the Census Bureau's projection of trend population is superior to a statistical estimate from an HP filter, we replace the HP-filtered trend with the Census Bureau's projections after 2015.
5 These structural factors include estimates of occupational and industiyjob mismatch, which we take from Aycegul Cahin, Joseph Song, Giorgio Topa, and Giovanni Violante, 2012, "Mismatch unemployment," Federal Reserve Bank of New York, staff report, No. 566, August; and estimates of the labor supply effects attributable to increases in unemployment insurance, which we take from Jesse Rothstein, 2011, "Unemployment insurance and job search in the Great Recession," Brookings Papers on Economic Activity, Fall, pp. 143-210, and Luojia Hu and Shani Schechter, 2011, "How much of the decline in unemployment is due to the exhaustion of unemployment benefits?," Chicago Fed Letter, Federal Reserve Bank of Chicago, No. 288, July.
6 As with population, we use the HP filter to estimate the trend of this ratio.
7 The increase and subsequent decline in the ratio of payroll to household employment is evident even when using the payroll-concept adjusted household employment series.
8 Another alternative path for population growth that we explored was to use the actual census data for population instead of our estimate of its trend. This would raise our estimates of trend payroll employment growth to around 120,000 per month in 2011 and 150,000 per month in 2012, but has only small effects on our estimates from 2013 through 2020
by Daniel Aaronson, vice president and director of microeconomic research, and Scott Brave, senior business economist
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