The Economist: US Labor Market 'May Be Permanently Stunted'

Wednesday, 19 Feb 2014 09:52 AM

By Dan Weil

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The unemployment rate dropped to a five-year low of 6.6 percent in January, but that's not a sign of strength, according to The Economist.

"Recent research suggests the unemployment rate is saying something important," according to an editorial in the publication. "It's just that the message is a depressing one: America's labor supply may be permanently stunted."

If that's true, the economy is growing closer to its potential than many economists estimate and "there is less downward pressure on inflation than the Fed has assumed," the editorial says.

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As for signs of a stunted workforce, the proportion of adults with jobs has hardly moved after plunging below 59 percent in 2009 from 63 percent in late 2007, according to the editorial. The labor participation rate has slumped to 63 percent from 66 percent in 2007.

In addition, unpublished research by Princeton University economist Alan Krueger shows that 24 percent of the long-term unemployed abandon the workforce each month, up from 18 percent in 2010, the editorial says. The portion finding jobs has slipped to 10 percent a month, and many of those jobs are temporary or part-time.

"Thus, with each passing month, more of the unemployed are drifting to the fringes of the labor market than re-entering it," the editorial states.

"Policymakers will need to put more effort into making the long-term unemployed once again employable."

Michael Ivanovitch, president of MSI Global, an economic research firm, has a much more positive view of the job market.

"While operating more than an entire percentage point below its potential growth rate, the U.S. economy still raised its business sector employment by nearly 2 million people over the last 12 months," he writes in a commentary for CNBC.

"That is a remarkable achievement because companies usually don't step up hiring until a sustained increase in capacity pressures them to start adding to their labor force."

And Ivanovitch expects even better job growth this year.

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