When Will the Unemployment Rate Reach 6.5 Percent?

04 Jan. 2013 | Comments (0)

The Federal Reserve’s latest statement announced that it will keep interest rates near zero until unemployment reaches 6.5 percent, triggering a big discussion in the media, and among economists, regarding when we will actually reach this number. Some early proposed estimates have ranged from 2014 to 2018.

In the table below, I used published data to make my own estimation. The change in the unemployment rate is determined by the growth rate of employment relative to that of the labor force[1]. In turn, the growth in the labor force depends on the growth in adult population (ages 16 and older) and the change in the labor force participation rate (the percent of the population ages 16 and older who are either employed or looking for a job). 

With respect to future population growth, I used predictions from the Bureau of Labor Statistics (BLS), which estimates population growth at about 1 percent per year. Concerning future changes in the labor force participation rate, I considered 3 scenarios noted in the table below:

  1. 1) In the early scenario, I used the January 2012 BLS forecast. In addition, I adjusted their forecast to take into account the 2012 rate of 63.7 percent (instead of the 64.4 percent previously forecasted). The annual change in 2013 and later years is the same as in the BLS forecast.
  2. 2) The middle scenario assumes that labor force participation will stay at 63.7 percent until 2015, subsequently converging to the BLS forecast.
  3. 3) The late scenario assumes some bounce back in the participation rate, with the rate in 2016 starting at 0.2 percentage points higher than the BLS forecast.

I believe the first scenario is least likely to occur, as it assumes no bounce back in the participation rate, even for the 25-54 age group. In general, the faster the rate of employment growth, the more likely it is for the participation rate to increase, as discouraged job seekers return to the labor force.

Based on these assumptions, the bottom panel of the table reveals the year in which I predict the unemployment rate to reach 6.5 percent, given potential combinations of average monthly change in the employment and labor force participation rates.

So what is the likely outcome? I will start by eliminating the unlikely results:

Why not 2014 or earlier? For the unemployment rate to reach 6.5 percent by 2014, we would need rapid employment growth in 2013 and 2014. Since it looks like employment will grow slowly as a result of the economic slowdown and the fiscal cliff, employment growth in 2014 will have to be unrealistically high to compensate for it. However if, for some reason, employment is booming, the participation rate would also increase, making it difficult to reach 6.5 percent.

Why not 2017 or later? For the unemployment rate to reach 6.5 percent after 2016, employment would need to grow by only 140,000 a month on average. Since we expect GDP to bounce back in late 2013 and grow above trend afterwards, this low rate appears to be too pessimistic a prediction.

In conclusion, I would predict that the unemployment rate will reach 6.5 percent by either 2015 or 2016. More precisely, I would expect 6.5 percent to be reached sometime in the second half of 2015.

 

 

LF participation Rate assumptions

Scenario

1

2

3

 

2012

63.7

63.7

63.7

2013

63.5

63.7

63.9

2014

63.3

63.7

64

2015

63.1

63.7

64

2016

62.9

63.6

63.8

2017

62.6

63.3

63.5

2018

62.3

63

63.2

2019

62.1

62.8

63

2020

61.8

62.5

62.7

Average monthly change in employment (thousands)

Year 6.5 percent would be reached

120

2016-2017

2019

2020

140

2015

2017

2017

160

2014

2016

2016

180

2014

2015

2015-2016

200

2013-2014

2014

2015

 

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[1] One technical issue that complicates the calculation is that the unemployment rate depends on the employment measure from the household survey, while the more commonly used measure of employment comes from the establishment survey. In this analysis, I assume that the growth rates of the two measures of employment will be identical. 

  • About the Author: Gad Levanon, Ph.D.

    Gad Levanon, Ph.D. Gad Levanon is director of macroeconomic research at The Conference Board, where he also leads the labor markets program. He also serves on The Demand Institute™ leadership team. Levanon create…

    Full Bio | More from Gad Levanon, Ph.D.

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