1. December 10, 2015
Reasons for Labor Market Optimism beyond the Unemployment Rate
By Andrew Tulumello
Abstract
The U.S. has experienced a substantial increase in labor market frictions since the onset of the Great
Recession. The effect of the recession on long-term unemployment and labor force participation was
particularly devastating. Despite the severity of these labor market frictions, this is only a temporary trend
in the ongoing cycle of the labor market; these frictions will not become permanent characteristics.
The dubiousness of the unemployment rate’s accuracy as an indicator of labor market strength has often
been noted in the aftermath of the Great Recession. While the unemployment rate remains a vital
measure, this paper’s assessment of labor market recovery is primarily derived from a study of other
factors.
Declines in long-term unemployment have coincided with a moderately stable labor force participation
rate over the past two years, and recent evidence points to the labor force attachment of the long-term
unemployed being higher than generally believed. Also, the existence of an aging population has been
more detrimental to the labor force participation rate than the recessionary effects on the labor market.
Finally, low levels of layoffs and discharges, as well as low initial jobless claims, provide further
indication of labor market recovery.
Positive developments in long-term unemployment
The long-term share of unemployment, the percentage of unemployed persons who have been
unemployed for at least 27 weeks, had reached uncharted territory at its 2010 peak of 45 percent. Since
then, that number has steadily fallen to its current level of 25.7 percent (BLS). Since 2011, about two-
thirds of the decline in the overall unemployment rate can be attributed to a reduction in the long-term
unemployment rate (Cajner 2014). The unemployment rate on its own can be an ambiguous indicator of
overall labor market strength, but it is given additional perspective when analyzed in combination with
factors such as the long-term share of unemployment. With two-thirds of the decline in the overall
unemployment rate since 2011 being attributable to decreases in the long-term unemployment rate, this is
a sure sign that progress is being made.

2. Figure 1
Declines in long-term unemployment driving reduction in overall unemployment
There are more reasons to be enthusiastic about the downturn in the long-term share of unemployment.
Over the past two years, this decline has corresponded with a mostly stable labor force participation rate.
The long-term share of unemployment fell from 37.7 percent in November 2013 to 28.6 percent in May
2015, while the labor force participation rate remained effectively unchanged over this period (BLS). This
provides evidence that the drop in long-term unemployment is not being driven by a drop in labor force
participation. It also suggests a lack of discrepancy between the labor force attachments of the long-term
and the short-term unemployed. These developments point to a renewed optimism for the plight of the
long-term unemployed and the labor market as a whole.
The enormous upshot in the numbers of the long-term unemployed was uniquely characteristic of the
Great Recession. Because it tends to become increasingly difficult to find work the longer one has been
unemployed, long-term unemployment is a dilemma without a simple solution. These people’s recent
ability to find jobs is evidence that lingering effects of the recession are fading, and the labor market is
indeed strengthening. This reduction in long-term unemployment also supports the credibility of the
declining unemployment rate as a true indicator of labor market recovery.
Progressions in cyclical and structural unemployment
The civilian unemployment rate, currently at 5.0%, has completed its descent back to pre-recession levels.
This rate of 5.0% notably coincides with the Congressional Budget Office’s estimate of the natural rate of

3. unemployment in the long-term. The fact that these numbers match indicates an absence of cyclical
unemployment in the economy; the current composition of unemployment is almost entirely frictional and
structural. This absence of cyclical unemployment suggests there is currently a healthy demand for labor
in the U.S. economy.
As firms face increased competition over a smaller pool of unemployed workers, this will eventually
place upward pressure on wages. This growth in compensation will provide additional incentive for
workers, especially those on the participation margin, to enter or remain in the labor force. These effects,
along with the unemployment rate already hovering around the natural rate of unemployment, will likely
prevent further acceleration in the decline of the unemployment rate. However, the upward pressure on
wage growth and labor force participation that should result from these developments are encouraging
sings for the labor market going forward.
Much of the structural unemployment resulting from the Great Recession will decrease in the long-run, as
worker mobility increases over time. In response to new technologies and labor market trends, workers
can learn new trades or go back to school, allowing them to perform work in new or different sectors.
With time, workers also have the ability to relocate across regions to areas with better job prospects. As
workers adapt to the post-recession structure of the labor market, structural unemployment will decrease
and the condition of the labor market will continue to improve.
Several factors influencing labor force participation
The underwhelming rate of labor force participation, currently at 62.5%, is quite concerning for the future
of the labor market and the economy as a whole. However, this is not a permanent development resulting
from the onset of the Great Recession. Rather, it is the result of a confluence of cyclical and secular
factors.
During a recession, the relative attachment of the unemployed to the labor market is generally higher than
would be under normal conditions. According to Elsby, Hobijn, and Sahin (2013), during periods of
recovery following a recession this effect unwinds and the unemployment pool is increasingly composed
of workers with a lower labor market attachment. During a recovery it is to be expected that workers on
the participation margin are more likely to exit the labor force than they would be under normal
conditions.

4. The recent decline in labor force participation is most significantly due to a demographic shift owed more
to secular forces rather than changes in the business cycle. According to a 2014 White House Council of
Economic Advisers report, slightly over half of the 3.1 percent drop in labor force participation from the
final quarter of 2007 through the second quarter of 2014 was due to the aging population. The baby
boomer generation was an anomalistic cohort whose aggregated retirement has sent the labor force
participation rate into a tailspin. This tailspin, however, is not expected to persist. According to the BLS,
by 2024 the labor force participation rate will have only dropped by one-and-a-half percentage points
from its current level.
Figure 2
The effects of an aging population will be largely offset by an increase in the labor force participation of
these older cohorts. Between 2014 and 2024 the age group of 65 to 69 is expected to see an increase in
labor force participation of over four-and-a-half percentage points (BLS). Increasing life expectancies
will also correspond with an increased physical ability of the elderly to perform work. A longer lifespan
also means financial obligations which may necessitate the elderly to remain in the labor force past the
traditional retirement age. For these reasons it can be deduced that the labor market has the ability to
adapt to demographic shifts; it will not be permanently characterized by a declining labor force
participation rate.
It is also worth noting that a declining labor force participation rate was a trend which began several years
before the onset of the Great Recession. In January of 2000 the labor force participation rate was 67.3%.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
16 to 19 20 to 24 25 to 54 55 to 64 65 to 74 65 to 69 70 to 74
PERCENT
Labor Force Participation Rate by Age
1994 2004 2014 2024

5. By January 2005 it had fallen to 65.8%. Perhaps this decrease was due to the makeup of the
unemployment pool adjusting towards workers with lesser labor market attachment in the aftermath of the
2001 recession. Perhaps it was due to changing demographics and other outside social and economic
influences. (Due to length constraints, the early 2000s downturn in labor force participation will have to
be addressed further in a subsequent study.) It is nonetheless plausible to conceive that the declining labor
force participation observed post-Great Recession is at least partly a result of factors which precede the
recession. In other words, had the Great Recession not occurred, there would have likely still been an
underlying trend of declining labor force participation, albeit at a slower rate.
Steady gains in payroll employment and job openings
In the aftermath of the Great Recession, job growth has made a solid recovery. This is another sign that
the toll this recession took on the labor market is not permanent. Steady job gains over the past five years
point to a recovering labor market that is likely to observe continued job growth going forward. Such
significant job growth puts downward pressure on the unemployment rate, and could potentially have a
positive impact on labor force participation. Over the past year, the U.S. has averaged a monthly gain of
237,000 jobs. Since January 2010 there has been a 9.68% increase in the total nonfarm payroll
employment (BLS). More people working is representative of a stronger demand for labor, and continued
job growth at this pace will ultimately lead to a renewed strength of the labor market.
The number of job openings has also been steadily on the rise since recession’s end. As of September
2015 there were 5.53 million job openings in the U.S., a 94.6% increase from the number of job openings
in July 2009 (BLS). At the very least this means that workers have more options when it comes to finding
a job, and at best it is an indication of a strong labor market.
Similar to the unemployment rate, job gains and job openings are not infallible measures of labor market
strength. These measures do not account for the quality or compensation level of the jobs in question. The
data on job openings also does not factor in the intensity with which a firm is trying to fill the position.
This recruitment intensity varies along with the true strength of the labor market – more intensity
(characterized by higher compensation offerings, less required qualifications) when the labor market is
strong, and less intensity when it is weak (Davis 2012). So it is possible that the increasing number of job
openings indeed reflects the increasing strength of the labor market, but it is also possible that job
openings are simply going unfilled as firms hold out for better qualified candidates willing to accept
lesser compensation.

6. Significant reductions in layoffs and initial claims
Since the end of the Great Recession, the U.S. has seen substantial decreases in levels of worker layoffs
and discharges. Such low levels of layoffs and discharges are indicative of an improving labor market. As
noted by Janet Yellen in a speech at the 2013 National Association for Business Economics Policy
Conference, “Layoffs and discharges as a share of total employment have already returned to their pre-
recession level.” The number of workers laid off or discharged in September 2015 was 40.3% less than
the corresponding number during the recessionary peak month of April 2009 (BLS). These developments
reflect the continuing improvement of the labor market, and provide yet another source of optimism going
forward.
Table 1
Noteworthy declines in Initial Claims, Layoffs since peak of Great Recession
Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Oct-15
Initial
Unemployment
Claims (1st
week of
month)
653,000 479,000 395,000 389,000 358,000 310,000 282,000 262,000
Layoffs and
Discharges
(Total nonfarm
in thousands)
2,592 1,660 1,669 1,841 1,720 1,703 1,784 1,670
Initial unemployment insurance claims serve as an effective leading indicator of the unemployment rate
and general labor market conditions. The number of initial claims has already descended to pre-recession
levels, and continues to decline further. In October 2015 the 4-week moving average of initial claims fell
below 260,000 for the first time since 1973 (DOLETA). Decreasing levels of initial jobless claims usually
signal future decreases in the unemployment rate. Based on recent measures of initial claims, it can be
expected that an unemployment rate at or below its current level will be observed into the near future.
The importance of worker perceptions of the labor market should not be underestimated. A lesser
mentioned indicator of labor market strength is the quits rate (the monthly number of job quits as a
percentage of total employment). A higher quits rate reflects workers’ increased confidence in their
ability to land a better job. While the quits rate has not made as quick of a recovery as layoffs and
discharges or initial claims, it is rising ever closer to its pre-recession rate. It has risen from 1.3% in
January 2000 to 1.9% in September 2015 (BLS). Worker confidence in the aftermath of the Great

7. Recession is slowly, but steadily rising. As this confidence continues to strengthen, so too will the labor
market.
Conclusion
Looking over the horizon, there are many rays of light illuminating the landscape of recovery. The freefall
of the labor force participation rate seems to be in its final stages, the plight of the long-term unemployed
does not seem a bleak as it once did, and many other useful measures have shown considerable and
consistent improvement. Although the process has been deliberate, even painful, the labor market is
showing signs of strength and recovery.
Like a living creature, the labor market is also evolving, developing new characteristics. Despite
indications of future stability of the labor force participation rate, it is not reasonable to expect any
significant increases in this rate anytime soon. And even though there appears to be a healthier demand
for labor, it has not been accompanied by higher wages. Improvements in real wage growth are vital to
the condition of the labor market and its potential for future strength.
The labor market outlook remains partly dependent on demographic developments and other external
economic variables. The existence of an aging population is not going to permanently weaken the labor
market, but adaptations must take place, most likely in the form of delayed retirement and continued
employment into old age. Finally, future increases in interdependent measures such as real GDP growth
and personal consumption expenditures would be greatly beneficial to labor market strength.
The U.S. labor market was ravaged by the Great Recession. Some of its effects still endure today, yet
these frictions do not appear to be permanent. A thorough analysis of the data yields reasons for optimism
in the labor market outlook.

8. References
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Gender, Race, and Ethnicity." Dec. 2015 Monthly Labor Review.
<http://www.bls.gov/emp/ep_table_303.htm>.
Bureau of Labor Statistics. U.S. Department of Labor. Employment Situation Summary. 4 Dec. 2015.
<http://www.bls.gov/news.release/empsit.nr0.htm>.
Bureau of Labor Statistics. U.S. Department of Labor. Job Openings and Labor Turnover. 12 Nov. 2015.
<http://www.bls.gov/news.release/pdf/jolts.pdf>.
Bureau of Labor Statistics. U.S. Department of Labor. “Labor Force Statistics from the Current
Population Survey: Of Total Unemployed, Percent Unemployed 27 Weeks & Over.” Dec. 2015.
<http://data.bls.gov/timeseries/LNS13025703>.
Cajner, Tomaz and David Ratner. “The Recent Decline in Long-Term Unemployment.” 21 Jul. 2014.
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Davis, Stephen J., et. al. “The Establishment-Level Behavior of Vacancies and Hiring.” 30 Dec. 2012.
<http://faculty.chicagobooth.edu/steven.davis/pdf/w16265.pdf>.
Elsby, Michael W.L., Bart Hobijn, and Aysegül Sahin. "On the Importance of the Participation Margin
for Labor Market Fluctuations," Feb. 2013. FRBSF Working Paper.
Employment and Training Administration. U.S. Department of Labor. 4-Week Moving Average of Initial
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White House Council of Economic Advisers. “The Labor Force Participation Rate since 2007: Causes
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<https://www.whitehouse.gov/sites/default/files/docs/labor_force_participation_report.pdf>.
Yellen, Janet L. "Challenges Confronting Monetary Policy." National Association for Business
Economics Policy Conference. Washington, D.C. 4 Mar. 2013.
<http://www.federalreserve.gov/newsevents/speech/yellen20130302a.htm>.