Bruce Krasting | Nov 10, 2013 05:50AM ET
I was blown out by the Labor Force Participation Rate (LFPR) data released Friday. Down 4 tics to 62.8%. That sounds like no big deal, but it is. Either there is something out of whack with the data, and it will be revised, or there will have to be some serious rethinking by the folks who develop long-term economic models, and also at the Federal Reserve.
Consider the short term consequences. The Fed has hung its monetary hat on an unemployment rate of 6.5%. We have been told, time and again, that if the magic number of 6.5% unemployment is reached, the madness of US monetary policy will be relaxed. Should the LFPR continue to drop, the hurdle rate for changes to Fed policy will come sooner than is anticipated.
The Atlanta Fed has an interactive tool that looks at this (Link). It takes into consideration the variables of the unemployment picture and produces a report of how many jobs are needed per month over a given period, to achieve the 6.5% level. A few examples:
Then you have the long-term side of declining LFPR. A low LFPR means that there are less workers earning taxable income. That translates into less government revenue. Payroll taxes (Social Security and Medicare) total 15% of wages. For an average worker making $40,000 a year that comes to $6,000. When the LFPR drops by 0.1% it means that there will be 180,000 less workers filling the tax bucket. The .1% drop translates into $1Bn less in tax revenue. The .4% drop in October therefore means $4Bn in lost revenue. It adds up quick.
All of the models used to forecast future federal deficits rely on a much higher LFPR assumption than today’s reality. The Congressional Budget Office did a long term forecast of LFPR. The CBO hung its hat on a LFPR that is higher than 62.8%, meaning the forecasts of future tax receipts (and subsequent deficits) were wrong.
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