What Level of Job Creation will Sustain Full Employment?

Greg Ip at the Wall Street Journal on the interpretation of employment statistics. The Fed believes that demographic changes have lowered the amount of job creation needed to keep the economy at full employment:

Fed Holds Different View on Jobs Equilibrium, by Greg Ip, WSJ: ...A rule of thumb on Wall Street is that it takes about 150,000 jobs a month to keep up with the growth in the labor force and thereby keep the unemployment rate steady. But the Fed’s view is that “equilibrium” job growth is only 110,000 per month.

Fed Governor Susan Bies, in a speech ..., said that the proportion of working-age people participating in the labor force, either working or seeking work, is declining. That’s principally because more baby boomers are entering their mid- to-late-50s, when many take early retirement. Without that decline in the participation rate, equilibrium employment growth would be about 140,000 a month, she says. Chicago Fed President Michael Moskow said in an August speech that just 100,000 jobs a month represented equilibrium employment growth.

That suggests that what the street might see as a “weak” employment report may not ring alarm bells at the Fed, unless it’s well below 100,000. Conversely, a number even moderately above the consensus of 125,000 would keep the central bank on the lookout for wage and cost pressures. But monthly payroll employment is highly volatile and heavily revised, so policy makers will probably pay more attention to the less volatile unemployment rate. ...

The change from 150,000 to 110,000 is fairly recent. Michael Moskow's speech, the first time I heard the revised estimate, was in June, 2006, a year and a half after the trough shown in the graph below. Moskow said:

With overall population growth continuing to slow and labor force participation not expected to rise, we probably need to adjust our benchmarks for what level of employment growth is consistent with economic growth near potential and a steady unemployment rate. It used to be that increases in payroll employment that averaged 150,000 per month were consistent with flat unemployment. Now that number may be closer to 100,000.

Here's the overall participation rate, and it doesn't seem to support such a large change in estimate of the job growth needed to hold unemployment steady (to two-thirds of its previous value):

Participation has been increasing since the trough in January 2005, not decreasing (this graph ends at December 2005, but more recent participation figures do not alter the picture - see below). Furthermore, the scale of the graph is deceptive and the overall variation is small. Participation is 66.8% in January 1995 at the beginning of the graph, and 66.2% for the latest available observation for September 2006, only a .6% difference. The peak is 67.3% in January 2000, and the trough is 65.8% in January 2005. Here's a longer term view:

Labor Force Participation Rate

In addition, participation rates for workers over age 55 have been steadily increasing over the last ten to fifteen years offsetting some of the changes due to the changing demographic composition of the labor force toward older workers. See Cyclical and Long-Term Labor Force Participation Rate Changes by Gender, Age, and Education or the data at the BLS web site for more.