"Constructing the Reason-for-Nonparticipation Variable Using the Monthly CPS"

As of the end of 2013, the jobless rate stood at 6.7 percent. While it is still high by historical standards, significant progress has been made. Moreover, the declines were often faster than many had predicted.1

One caveat, however, is that, over the period of this faster-than-expected decline in the unemployment rate, the labor force participation rate has also declined. Between October 2009 and December 2013, the participation rate declined 2.2 percentage points, from 65.0 percent to 62.8 percent. A simple argument is that jobless workers, in facing difficulties in finding a job, are becoming discouraged and leaving the labor force, thus pushing down both the unemployment rate and the participation rate. To the extent that this argument is true, unemployment has been declining for the “wrong reason.” In this article, I reexamine this argument by putting together new pieces of evidence from the Current Population Survey (CPS).2 Details of the steps to construct the data used in this article are described in Fujita (2014).

[1]According to the Survey of Professional Forecasters conducted by the Real-Time Data Research Center of the Federal Reserve Bank of Philadelphia, the median forecast of the unemployment rate for the third quarter of 2013, made one year earlier, was 7.8 percent. But it turned out to be 7.2 percent. The same pattern almost always holds for forecasts made over the past three years: Forecasters’ one-year-ahead projections for the unemployment rate have consistently exceeded the realized rate.

[2]The CPS is the official survey from which the unemployment rate and the participation rate are derived.