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Unemployment Falling for Wrong Reason Creates Fed Predicament

Bloomberg (09/09/13) Rich Miller

Although the U.S. unemployment rate has fallen to 7.3%—the lowest level since December 2008—the news is not all good, because much of the decline is tied to a contraction of the work force and not because more people got jobs. Labor force participation is now at a 35-year low. These trends could pose a problem for the U.S. Federal Reserve, which said it would complete its bond-buying program by the middle of 2014 when the unemployment rate is likely to reach about 7% and would maintain its benchmark interest rate until the unemployment rate falls to 6.5%.

The question is whether the decline in the labor force participation rate is structural and long lasting or cyclical and temporary. Experts say that if the decline is related to more baby boomers retiring, then the unemployment rate provides a “true” picture of the slack in the labor market. However, if it is caused by discouraged job seekers giving up the search for a job, the jobless rate is not a “true” reflection of the market.