Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

The new normal for the jobless rate is pretty lame

September jobs report disappoints

If some economists are right, it's going to take a whole lot less progress in the jobs market to get the unemployment rate to keep falling.

Anyone following the steady decline in the jobless figure knows that the reasons for the move are complex and not just about more people finding work. Some of the reasons, in fact, are not particularly positive signs pointing to real economic progress.

Much of the decline has been about people simply leaving the workforce. A record 94.7 million Americans are considered out of the labor force, pushing the participation rate to its lowest level since October 1977.

If someone is not actively looking for employment, they simply aren't counted in the headline number. That's been a big reason the rate has declined from 10 percent in 2009 to 5.1 percent currently. It simply doesn't take as much job creation as it used to in order to get the unemployment rate to drop. The current employment to population ratio of 59.2 percent is about the same as it was when the unemployment rate was 9.6 percent.

If current trends hold, then, it will take even fewer jobs to lower the headline rate than has been the historical norm.

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In fact, Goldman Sachs economists believe that it will take no more than 85,000 jobs a month now to keep the unemployment rate steady, with any more than that driving the level lower. That's a significant departure from long-held conventional economic wisdom that it would take between 150,000 and 200,000 new jobs a month to maintain the unemployment rate level.

Read More About those blockbuster jobs reports: They're over

Even that lowered bar could drop more if the decline in labor force participation accelerates from its projected 0.2 percentage points a year to, say, 0.4 percentage points. In the latter scenario, that would mean only 45,000 jobs would need to be added to hit the break-even jobs level, according to Goldman.

The analysis, presented in a research note Monday and coming as the U.S. economy has averaged just 139,000 new jobs over the past two months, is important on several fronts.

Most significantly, it corroborates earlier forecasts from the Federal Reserve that it will take lower levels of job creation to drive down the headline unemployment rate.

Back in 2013, Chicago Fed researchers estimated that the break-even number was as low as 80,000 then and would decline perhaps to 35,000 by 2016.

Read MoreNew math makes it easier to lower unemployment rate

Interestingly, Jan Hatzius, Goldman's chief economist, took issue with that estimate at the time, objecting primarily because he said a paper by Fed economists overestimated the rate at which the labor force participation rate would decline. However, since a report appeared on the issue in June 2013, the participation rate has fallen from 63.4 percent to 62.4 percent, a rate of about 0.4 percentage points a year.

The Goldman analysis this week also helps explain why Fed officials have turned their attention away from the headline unemployment rate as a barometer for policy.

Fed officials at one point had estimated that a 6.5 percent unemployment rate, coupled with 2 percent inflation, would serve as a helpful yardstick for when to the central bank's key policy rate, which has been stuck near zero for almost seven years, could start to move higher. That level has long seen been breached, with no policy movement by the Fed other than it discontinuing its monthly bond-buying program known as quantitative easing.

With external influences playing a bigger hand on the rate's calculations, Fed officials have turned to other measures, including the Job Openings and Labor Turnover Survey, or JOLTS, as well as the so-called U-6 or "real" unemployment rate, which includes those not looking for a job or working part time for economic reasons. That number is still at 10 percent.

Goldman Sachs economist David Mericle said determining how many jobs it would take to maintain or lower the real rate "is less clear and requires a number of additional assumptions."

He, however, said lowering the U-6 actually could require an even lower figure than 85,000 because of people transitioning from not looking to no longer even wanting a job, as well as the underemployed taking "stepping stone" full-time jobs on the way to finding jobs that better suit their skills.

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