http://www.economist.com/news/finance-and-economics/21596529-americas-labour-market-has-suffered-permanent-harm-closing-gap
The job growth slowed down sharply in December and stayed weak through January. But the unemployment rate dropped from 7% to 6.6% in January since November. These numbers are showing how well America is recovering in recent years. According to recent researches, the unemployment rate is sending a message that America's labor supply does not grow anymore permanently, which means the economy is operating closer to its potential (using all the possible labors and capitals). The labor participation rate decreases from 66% in 2007 to 63%, because baby boomers are retiring early and people who had been unemployed for so long just gave up looking for jobs. This is one of the reason The Congressional Budget Office lowered American's potential estimation. And because of it, "the size of the output gap, which it now puts at a little over 4% of GDP. Has its estimates of the economy's potential not shrunk since 2008, that gap would be 10% of GDP". According to the article, "More monetary and fiscal stimulus may have saved them a few years ago, but are of much less help now." Because many people are tired of looking for jobs, when they quit or get fired, they would rather stay out of the labor force than re-entering. Finding ways to encourage people enter or re-enter the labor force is one of the most important things that government and the Fed should take action right away.
I agree that the Fed should definitely try and figure out ways to encourage people to enter or re-enter the labor force in order to help fix this issue. It is strange that the unemployment rate decreased while the job growth rate also slowed down. This is a good sign obviously, but I would like to know what is causing this increase in employment so much. The economy is currently doing very well, but I think that there may be something else behind it. Unfortunately, America's potential was lowered due to the labor participation rate being decreased, but we have shown how much more we can do with the increase in of jobs with the decrease of job growth. We must be reaching our full potential.
ReplyDeleteI find it interesting how the maximum potential of the American economy is being reached while the employment participation rate have decreased. I completely agree that the Fed should encourage people to join the labor force which will increase the labor participation rate. There are many options to doing so for example, the Fed can decrease incentives they give to unemployed workers which will stimulate their desire to obtain a job. Through fiscal means, the Fed can decrease taxation allowing firms to increase the employment cap thus reducing the unemployment rate. This may theoretically increase the assumed potential of the US economy.
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