Kellner: Unemployment Worse Than It Looks

Wednesday, 04 Sep 2013 11:34 AM

By Dan Weil

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The recent drop in the unemployment rate – to a 4 ½-year low of 7.4 percent in July – masks a decline in the labor force participation rate, says MarketWatch chief economist Irwin Kellner.

The jobless rate decline in July "was mainly a result of fewer people looking for work," he writes.

If not for the 240,000 people who gave up seeking employment in July, the unemployment rate would have been almost 0.2 percentage point higher, Kellner says.

Editor’s Note: Obama’s Budget Takes Aim at Retired Americans

The labor-force participation rate peaked around 67 percent in 2000 and now has slipped to about 63 percent, he says. That rate measures the amount of people over the age of 16 and not in school, jail, a hospital or the military who are working or looking for work.

So why is the rate falling?

One reason is likely "the skills gap," Kellner says. "This is the inability of our educational institutions to prepare people for an increasingly complex, technologically-advanced economy."

Second, there's the sluggish economic growth of the last 13 years, Kellner says. "The bursting of the dot-com and housing bubbles, along with the financial crisis that began six years ago" made it more difficult to find a job.

As for Friday's August jobs report, non-farm payrolls are expected to have increased by 180,000 jobs last month, according to a Reuters survey of economists, up from a gain of 162,000 in July. The jobless rate is expected to hold steady at a 4-1/2-year low of 7.4 percent as more people search for work, a sign of confidence in the labor market.

“We’re on track for a pretty solid payrolls report for August,” Brian Jones, a senior U.S. economist at Societe Generale, told Bloomberg News. “It goes hand in hand with the improving economy.”

Friday's jobs report is the last important piece of economic data the Federal Reserve will have to work with before the central bank decides whether or not to pull back on its massive bond-buying program, the Associated Press reported. That program has kept interest rates abnormally low. While most investors believe the Fed will begin to pull back, the question has become when and how much.

"Even if the August employment figures were weaker than expected, we think the odds would likely still favor a September (pullback), just of a smaller magnitude," economists with the investment bank RBS wrote in a note to investors.

Deutsche Bank economists said that if the payrolls figure exceeds 190,000 and the unemployment rate falls to 7.3 percent, they expect the Fed will start cutting bond purchases, Reuters reported.

"August employment would have to meaningfully disappoint for the Fed to back away from the time table presented by Chairman Bernanke in the June post-meeting press conference," they wrote.

Editor’s Note: Obama’s Budget Takes Aim at Retired Americans

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