http://www.marketwatch.com/news/story.asp?guid={A4486D2F-D56A-402C-B769-C400D88B208D}&siteid=mktw U.S. jobless rate understated, study says Labor force participation rates have not rebounded By Rex Nutting, MarketWatch Last Update: 2:56 PM ET July 15, 2005 WASHINGTON (MarketWatch) - The current low U.S. unemployment rate probably understates the true level of joblessness by 1 to 3 percentage points, the senior economist at the Boston Federal Reserve says. Millions of potential workers who dropped out of the labor force during the recession four years ago have not returned as expected and are thus not counted in the official unemployment statistics, said Katharine Bradbury in a paper published by the Boston Fed. Read the study. The jobless rate fell to 5% in June the lowest level since the terror attacks of September 2001. Labor force participation rates "have not recovered as much as usual and the discrepancies are large," she wrote. "Current low rates of labor market participation thus potentially represent considerable slack in the U.S. labor market," she wrote. The amount of slack in the economy is a key variable for Federal Reserve policymakers, who have been raising interest rates for more than a year to return rates to "neutral' levels. All things equal, the more slack in the economy, the lower rates ought to be. Some policymakers have argued that the economy is close to full employment with the jobless rate at 5%, thus justifying higher rates to pre-empt inflationary pressures from building in a tight labor market. While the official unemployment rate has fallen from a peak of 6.3% in June 2003 to 5% in June 2005, the labor force participation rate remains close to 15-year lows of 66%. Typically, labor force participation rates rebound sharply following recessions, Bradbury found. The official jobless rate understated the severity of the slowdown in 2001 and has overstated the strength of the recovery since then, she said. Government unemployment statistics are calculated by asking adults who aren't working if they'd like to work and if they've actively looked for work. Only those who are working or looking are considered in the unemployment rate calculations. Crunching the numbers The unemployment rate is derived by dividing the number of people who are unemployed (and looking) by the number of people in the labor force. The labor force participation rate is calculated by taking all those working or looking for work and dividing by the total adult population. The labor force participation rate has changed dramatically over the past 40 years as more women entered the workforce and more teenagers and young adults continue their education. At the same time, participation rates for adult men declined, as more took early retirement and disability benefits improved. In 1965, only about 59% of all adults were in the labor force. By 1996, the figure had risen to 67%. When the recession began in March 2001, the participation rate was 67.2%. All of the improvement in participation rates during this recovery has come from people over 55, as more relatively healthy Baby Boomers enter this cohort. At the same time, participation rates for teenagers have fallen to 44% after averaging more than 50% during the 1990s boom. If labor force participation rates had improved as much during this recovery as typical, between 1.6 million and 5.1 million more people would be in the labor force, Bradbury concluded. If those people were counted in the labor force but not working, the jobless rate would have been somewhere between 6.5% and 8.7%, rather than the 5.4% reported by the Labor Department in the three months from November 2004 to February 2005. "An 8.7% unemployment rate would represent considerable slack in the labor market," Bradbury said. http://www.bos.frb.org/economic/ppb/2005/ppb052.pdf