Why The Unemployment Rate Will Stay High For Years To Come

America's unemployment currently stands at 9.6%. The San Francisco Fed released a report which shows why the rate will not be coming down for years to come. Why? The sheer number of jobs that need to be created each month in order to reduce the unemployment rate is far above the current rate of job growth. The Fed's report plays with the numbers and asks what it would take to reduce the unemployment rate to 8% by June 2012? The numbers not encouraging:
1. To keep the unemployment rate steady at 9.6%, the US economy needs to create 100,000 jobs per month. This assumes average population growth of 1% and a flat labor force participation rate.

2. According to the Congressional Budget Office, the US economy needs to create 227,000 jobs per  month. This assumption is based upon a projected uptick in the labor force participation rate to 64.8%. If the CBO is off by only 0.1%, the number jumps 10,000 to 237,000 jobs per month required.

3. The Social Security Administration expects the labor force participation rate to fall to 64.6% in 2012. This means that starting September 2010, the US has to create 208,000 jobs per month to reach the 8% unemployment rate goal.

4. The Bureau of Labor Statistics is predicting a labor force participation rate of 65.5% in 2012. Under this assumption the US economy has to create a whopping 294,000 jobs per month.

5. In August 2010 the US private sector created 67,000 jobs, far below the rate necessary to reduce the unemployment rate. During the last "jobless recovery," when economic conditions were much more favorable job creation averaged 140,000 jobs per month.

Below is a chart which sums it all up.

Figure 1

Job creation needed per month
Assuming 8% unemployment in June 2012

Bottom line--don't expect the unemployment rate to come down anytime soon. If anything, it might tick up in 2011.

Black Swan Insights


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