8.2% Unemployment: QE3 Odds Have Risen

After three months of 200,000-plus gains, nonfarm jobs rose by a disappointing 120,000 in March, returning to the weaker trend of prior months. Economists point to the warm winter weather which led employers to advance the timing of their hiring, in effect borrowing from the future. Once the seasonal irregularly is behind us, some say, the improved cyclical pickup will resume. Maybe.

The more comprehensive measure of employment - civilian employment based on household survey - failed to rise last month. And when adjusted to be consistent with the definition of nonfarm payroll employment, it fell by a disheartening 418,000.

Many have pointed to last month's unemployment rate, which fell again, from 8.3 to 8.2 percent, as another good sign. But the apparent drop was too small to pass the test of statistical significance. The jobless rate has essentially remained unchanged for the last three months.

OK, but we really need to step back and take a longer look

The percent of the civilian working-age population employed, a key indicator, unfortunately paints a dismal picture. It has been flat for more than two years. It was 58.5 percent last month and was 58.5 percent in October 2009. (The employment-population rate is compatible with and comes from the same household survey as the official unemployment rate and the labor force participation rate.)

But hasn't payroll employment from the government's employer survey been on an uptrend during that time, albeit not as strong as hoped?

Yes, but to put a dent in the unemployment rate, employment has to grow faster than the working-age population, and for the past 2½ years payrolls as well as civilian employment have failed to do that.

Then how come the unemployment rate has declined? Since October 2009 it has fallen from 10 percent to 8.2 percent.

Part of the reason is a falling labor force participation rate. In a weak job market, jobseekers become frustrated and eventually give up looking for work and so are not counted as officially unemployed. When job prospects improve, they typically re-enter the labor force and resume job search, thereby putting upward pressure on the unemployment rate.

Also, long-term unemployment remains stubbornly high and the skills of many jobless are being eroded, leading to forced retirement or application for disability. Although the structural component of unemployment is rising, the cyclical component still appears to be dominant.

Structural unemployment is often thought to be hard core, but it's not. If the labor market gets tight enough and employers need more workers, it will be profitable for them to invest in training that converts the structurally jobless into the cyclically employable.

The aging of the population, retirement among the elderly, and lengthier schooling of younger people have also helped push down the total labor force participation rate. In addition, the geographic mobility of the jobless has been impeded because of persistent mortgage problems.

In recoveries, hours lead employment. When employers have work to be done, it's less costly for them to increase the hours of their existing employees before they begin hiring. Currently this is a major impediment to job creation, though last month's sizeable drop in the number of employees involuntarily working part-time for economic reasons is a hopeful sign. But there's still a way to go.

In March, involuntary part-timers numbered 7.7 million, down from 8.1 million in February. But despite the improvement, this is still way above the 4.6 million count at the December 2007 peak of the business cycle. This, plus the accumulation of "hidden" unemployed waiting on the sidelines, tells us we could easily be in for a year of weak job growth and sticky unemployment.

Fed chairman Ben Bernanke recently said that it will take faster economic growth than we've had in the past year to significantly reduce unemployment. He got that one right. To take a meaningful bite out of unemployment this year would require an economic growth rate of 3½ percent or more, a rate that is above both the consensus forecast and the Fed's outlook.

The odds of a QE3 have risen.