On December 18th, the Federal Reserve’s Open Market Committee announced its decision to “modestly reduce the pace” of its asset purchasing program from $85 billion to $75 billion per month. Indicating just how modest this reduction was, the Dow Jones Industrial Average surged by nearly 300 points closing at a record high. As justification for this modest reduction, the FOMC noted a number of factors indicating that “economic activity is expanding at a moderate pace,” including the fact that “the unemployment rate has declined.” Yet, the FOMC’s enthusiasm about the labor market was tepid at best. While the official unemployment rate declined to 7 percent in November, the lowest it’s been since 2008, the FOMC noted that it “remains elevated.” Boston Fed President Eric S. Rosengren voted against the modest reduction believing that it was premature “with unemployment still elevated.” On the day the Bureau of Labor Statistics released the November unemployment numbers, Chicago Fed President Charles Evans stated that “[t]he unemployment rate [drop] probably overstates the improvement in the economy.” Fed Chairman Bernanke similarly noted in early November that “the unemployment rate probably understates the degree of slack in the labor market.” Despite the FOMC’s modest reduction, both statements are unequivocally true. At CKE Restaurants, labor market slack shows up in our applications versus hires. Year to date we’ve received nearly 200,000 applications for about 15,000 entry level part time positions, or 13 applicants per position. Higher level positions, such as field management, average 325 applicants per position. This is a lot of slack, but at least the BLS recognizes that these people exist; they show up in the labor force as either employed or unemployed. The slack that fails to show up in the official unemployment rate comes primarily from two other sources: (1) People leaving the labor force; and, (2) treating part time jobs the same as full time jobs. The impact of people leaving the labor force, what Chairman Bernanke refers to as “important downward trends in participation,” is straightforward: As people leave the labor force, they also leave the ranks of the unemployed reducing the unemployment rate even in the absence of job creation. November’s labor participation rate clocked in at 63 percent. With the exception of October’s participation rate (62.8 percent), this is the lowest labor participation has been since April of 1978. Between September and November, the economy added only 83,000 people to the ranks of the employed while 265,000 people left the labor force. The unemployment rate fell from 7.2 percent to 7 percent because people stopped looking for jobs and left the labor force, a seemingly positive result caused by an obviously negative trend. This downward trend during President Obama’s term, as noted in the chart below, has been consistent and disturbing.