Why? [url=http://www.economist.com/news/finance-and-economics/21596529-americas-labour-market-has-suffered-permanent-harm-closing-gap]The amount of labour has shrunk.[/url] [quote]IT TOOK barely a month for the bubble of optimism that formed over the American economy at the start of the year to deflate. Job growth slowed sharply in December, and stayed weak in January, suggesting more than bad weather was to blame. The unemployment rate, though, tells a much cheerier story: it dropped to 6.6% in January from 7% in November. Indeed, it could soon hit the Federal Reserve’s 6.5% threshold at which it may consider raising interest rates. The jobless number has been sending a strangely upbeat message about America’s recovery for some years now. Yet the Fed and other researchers have downplayed its significance, linking the rate less to buoyant demand for labour than to stagnant supply, as discouraged workers stop hunting for jobs. On February 11th Janet Yellen, in her inaugural appearance before Congress as chairman of the Fed, called the recovery in the labour market “far from complete” and averred that she would consider “more than the unemployment rate” in deciding when to declare it healed. [b]Listen to the numbers[/b] Even so, recent research suggests the unemployment rate is saying something important. It’s just that the message is a depressing one: America’s labour supply may be permanently stunted. If so that would mean that the economy is operating closer to potential—using all available capital and labour—than generally thought, and that there is less downward pressure on inflation than the Fed has assumed. Figuring out the gap between actual and potential output is tricky because potential, always hard to discern, is more uncertain than usual. In a recent report Lewis Alexander of Nomura Securities, a bank, calculated the output gap using three different labour market indicators (see chart). The proportion of people with jobs plunged from 63% of the population in late 2007 to below 59% in 2009. It has barely budged since, suggesting the output gap has not closed at all. The unemployment rate, in contrast, is 1.1 percentage points above its estimated “natural rate” of 5.5%, suggesting most of the output gap has disappeared. Finally, if one looks just at those who have been unemployed for less than six months, the output gap appears to have closed completely.[/quote] Moral of the story: those looking for work are likely going to be okay. If the economy is really going to be fixed, Obama should focus on targeting those who have been out of employment for a long time and those who have just stopped looking altogether.