- The Washington Times - Saturday, December 18, 2004

What is the outlook for the U.S. job market in 2005, and how long is it likely to take the economy to reach full employment?

So far this year quarterly economic growth has averaged about 4 percent annualized, and prospects are for a 3 to 4 percent increase in real gross domestic product next year. Productivity growth has slowed in recent quarters from the unusually high rates of 2002 and 2003, following the typical pattern of an aging recovery, and is likely to ease further next year as it approaches its long-term trend. With slower productivity growth, businesses can be expected to hire more workers to satisfy demand.

Giving productivity and the workweek a little elbow room, this scenario is consistent with an annual growth rate of total employment between 1 and 2 percent to the end of next year, equal to an average monthly employment increase between 175,000 and 230,000. The extent to which employment growth will translate into reductions in the officially measured unemployment rate depends on how many people outside the labor force decide to enter the market and compete for jobs with the active unemployed.

The labor force participation rate has declined every year since 2000, mainly as the result of a lagging and less than ebullient job market. But it seems unlikely the downtrend will continue if employment shows even moderate further improvement. A growing mismatch between available and required worker skills could slow labor force entrance, but would be unlikely to outweigh the pull of new jobs. Labor force growth could also be restrained by a shift in preferences toward nonmarket activities, or by more people rejecting the kind of jobs locally available or the pay offered.

If employment growth between now and the end of next year is at the low end of the probable range, rising at a modest 1 percent annual rate, it may be enough to halt the downtrend in labor force participation, but probably not enough to increase it much. With a stable participation rate, jobs would flow to the active jobseekers in the labor force, lowering last month’s 5.4 percent unemployment rate about three-tenths of a point by the end of next year. However, even a small positive response in labor force participation would be enough to prevent the jobless rate from declining.

Stronger but quite feasible employment growth at the upper end of the range, 2 percent, would cut deeper into unemployment, though not dramatically, since the hiring step-up would likely draw more people into the job market. A rise in the labor force participation rate that reversed about a fourth of the decline since its pre-recession high would keep the unemployment rate from falling below 5.1 percent by a year from now, despite healthy job growth. If, as seems unlikely, the participation rate should level off, the jobless rate would fall sharply, to 4.6 percent by next December.

Full employment doesn’t look to be in the cards for the next year or two. From 1998 through 2000, prior to the recession, the unemployment rate averaged 4.2 percent in a relatively stable price environment, and about the same rate remains a viable noninflationary full-employment target for today’s economy. If employment rises only at a 1 percent annual rate next year and in the years immediately after, even if labor force participation does not rise, it would take about four years to reach full employment.

Were employment to increase at the 2 percent rate, and the participation rate responded strongly by three-tenths of a percentage point yearly, it would still take until late 2008 to achieve an unemployment rate in the low 4 percent range. Because of the sensitivity of unemployment to labor force participation, if the participation rate went up a tenth of a point less yearly, as seems more reasonable, full employment would be reached by spring 2007. And if the participation rate leveled off and remained stable, unlikely in a robust job market, the economy could attain full employment as measured by the official unemployment rate as early as mid-2006, though inactive joblessness outside the labor force would be substantial.

By any measure, tomorrow’s economy must pay a price for the accumulated exodus of the unemployed from the labor force that resulted from the slow job market since the last recession. The price is more job growth than normally required to lower joblessness and reach full employment.

For 2005, an optimistic yet realistic scenario would describe economic growth around 4 percent, with productivity growth slowing, employment expanding by an average 230,000 a month, labor force participation rising somewhat, all yielding about a 4.9 percent unemployment rate by the end of next year. Employment growth in the middle of the probable range, averaging about 200,000 a month, with only a small rise in labor force participation, would lower unemployment modestly, to 5.1 percent a year from now.

Unless the economy surprises us, full employment, stringently defined, seems more than two years away.

Alfred Tella is former Georgetown University research professor of economics.

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