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Expect: Greater Growth, a Lower Jobless Rate ...

And a higher interest rate?

12:00 AM, May 3, 2014 • By IRWIN M. STELZER
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A good part of the decline in the unemployment rate is due to the decision by millions of workers to drop out of the labor force. If the labor force participation rate had not deteriorated since late 2008, the unemployment rate would be close to 11 percent. Worse still: about half of those dropping out of the labor force are in their prime working years, rather than retirees. This means that most of the so-called improvement in the labor market has been due to reduced availability of workers rather than to an increase in the demand for them. Call it a jobless recovery. 

Equally worrying is that 3.5 million workers remain out of work for longer than 27 weeks. Conservatives are pointing to an April decline in that figure as proof that congress’ decision not to extend unemployment benefits at the end of 2013 is driving the long-term unemployed back into the work force, and that the majority of the long-term unemployed will find jobs if the economy would only grow faster. Others are not so sure that the dropouts represent a vast reserve army of the unemployed eager and able to re-enter the labor market (and in the process restraint wage increases and inflation). They say that these workers are too unskilled or deskilled ever to hold the sort of jobs being created in the modern American economy, witness complaints from employers who cannot fill openings for welders (salary: $100,000 per year) and similarly skilled workers. 

Which brings us to the quality of the jobs being created. To summarize a huge data trove: more high-paying jobs are being lost than are being created, while the number of low-paying jobs is increasing. Meet your recent graduate, the hamburger flipper. An exaggeration, and ignores the fact that entry-level jobs often lead to better ones, but a worry nevertheless, especially for a graduating class that has been lured into indebtedness by feckless government policies.

My own guess is that the growth rate will accelerate to at least 3.5 percent, and that the unemployment rate will continue to drop. But this will not solve the problems of low labor-force participation and the skills shortage. More rapid growth and a lower unemployment rate will leave the Fed in what former Fed governor Larry Lindsey calls “the unenviable position” of having to raise interest rates before the market does it for them, even while its chair, Janet Yellen, remains unhappy with the condition of the labor market. 

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