Structural factors are ensuring that the unemployment rate in the US today is not what it was in periods past.  Yellen has seemed to be more in the camp that the decline in the labour participation rate (PR) since the crisis has been mainly cyclical in nature and therefore treatable using monetary policy.

However, there is mounting evidence to the contrary.  A recent Fed paper contends that three quarters of the decline in the PR since 2007 can be attributed to structural factors, mainly the retirement of the baby-boomers, but also increased participation in further education, and increases in the number of claims for disability benefits.

As the chart below shows, using a pre-crisis PR and holding other variables constant would lead to a much higher UER today.


Also, the UER would have ceased to improve over the last year or so, unlike the official rate which has now declined to around most estimates of NAIRU* (non-accelerating inflation rate of unemployment).  The paper also projects that demographic trends will continue to drive the PR lower in coming years, by another 1.6% points by 2022 (next chart):


The writers conclude that this will hold down trend output growth by about 0.5% points per year for the rest of the decade.  Also, further showing that the UER is not really what it used to be, they predict only 50,000 to 75,000 jobs will need to be created per month to maintain an unchanged UER, far fewer than before.

* This is from our Tactical report of the 8th September, and at last week’s Fed meeting, the importance of the unemployment rate in making policy decisions was played down, and the estimate of NAIRU was revised down.  Once again the Fed has moved the goalposts and has erred dovishly, as we have advised clients it would through Yellen’s tenure.

At some point this will show itself to be misguided and the Fed will have to play catch up, but we have not reached that point yet.