How Many New Jobs Will Stop Unemployment from Climbing?

On Friday, we learned that just 18,000 new jobs were added to the economy in June. That follows an almost as pitiful 25,000 created in May. Eternal optimists might say that some jobs added is better than no jobs added. Obviously, that's true. But this number of jobs is actually too few to prevent the unemployment rate from rising. Each month, the population grows and more workers enter the labor market, looking for jobs. How many people must find jobs just to keep the unemployment rate steady?

The short answer: it depends who you ask. The number of jobs necessary to keep up with population growth depends on how many of those people want a job. This proportion is called the participation rate. In June it was 64.1%. Different economists have different estimates of what this rate will be in the months and years to come

Calculated Risk writes about the Congressional Budget Office projections:

We also have to be clear on the time frame we are discussing. The CBO report is through 2021, and the CBO is projecting the participation rate to fall to 63% by 2021 due to an aging population.

If, instead, we asked how many jobs are needed over the next year to keep the unemployment rate steady using the CBO projection of the participation rate, the answer is very different. The CBO is projecting the participation rate will be at 64.6% in 2012 and the current participation rate is 64.1%.

Over the next year, if the participation rate remains at 64.1%, then 95,000 new jobs will be needed each month just to keep the unemployment rate constant. But if the CBO's estimate of 64.6% is used, then 187,000 jobs would be needed, assuming that population growth mirrors the last 12 months. Obviously, the U.S. economy produced no where near that many jobs in May and June.

To put June's 64.1% into perspective, the participation rate hovered around 66% in the years leading up to the recession. To achieve full employment at that participation rate would be a much bigger challenge. Then, even under the CBO's assumptions, you'd need over a quarter million jobs per month just to keep unemployment steady.

But the really dim silver lining here is that the labor participation rate should naturally fall over the next decade as the U.S. population ages. The number of people leaving the workforce will grow as many Americans retire. As a result, the new jobs created will have a bigger effect than they would have over the prior decade.

Of course, that provides little consolation in the short term. At this time, we know that a huge chunk of those who have left the work force aren't gone for good. Comparing June 2011 to January 2007, about 2 million more people are not technically considered a part of the labor market, but still want a job. As many of these Americans in a technical limbo reenter the work force, they will boost the participation rate and make it even harder for new jobs to cut the unemployment rate over the next few years.

Read the full story at Calculated Risk.