SOURCE: Federal Reserve Bank of Richmond
RICHMOND, VA--(Marketwired - Dec 20, 2013) - Unemployment and labor force participation (LFP) are usually negatively correlated over the business cycle -- that is, once the unemployment rate starts to decline the LFP rate starts to increase after about half a year. In the latest issue of Economic Quarterly, Richmond Fed senior advisor Andreas Hornstein shows that this cyclical co-movement pattern between the unemployment rate and the LFP rate can be attributed to two factors. First, low unemployment rates imply a low average exit rate from the labor force, which in turn increases the LFP rate. Second, transition rates from out-of-the-labor-force to employment without an intervening unemployment spell increase as unemployment rates decline. The behavior of unemployment and LFP in the current recovery has been "unusual" -- even though the unemployment rate has been declining since 2010, the LFP rate has not yet begun to increase. This unusual behavior is potentially informative about the relative magnitude of the cyclical and trend component in recent LFP rate movements.
You can find the full text of this article and others in the latest issue of Economic Quarterly on our website.
Also in the First Quarter 2013 issue:
- A Cohort Model of Labor Force Participation by Marianna Kudlyak
- Saving for Retirement with Job Loss Risk by Borys Grochulski and Yuzhe Zhang
The Economic Quarterly is a free publication containing economic analysis pertinent to Federal Reserve monetary and banking policy. For more information, contact the Federal Reserve Bank of Richmond's Research Department--Publications at 800.322.0565 or visit www.richmondfed.org/research/.
The Richmond Fed serves the Fifth Federal Reserve District, which includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia and most of West Virginia. As part of the nation's central bank, we're one of 12 regional Reserve Banks that work together with the Federal Reserve's Board of Governors to strengthen the economy and our communities. We manage the nation's money supply to keep inflation low and help the economy grow. We also supervise and regulate financial institutions to help safeguard our nation's financial system and protect the integrity and efficiency of our payments system.