* Jobless rate drop could slow, stall near key thresholds
* Discouraged job seekers key to unemployment rate path
By Ann Saphir
CHICAGO, Dec 17 (Reuters) - The U.S. unemployment rate could level off or even turn higher depending on how fast discouraged job seekers return to the job hunt, according to research published Monday.
That could deal a blow to consumer confidence and spending, the research by top San Francisco Federal Reserve Bank economists suggested.
Although left unsaid, the research suggests that it could lead the Fed to keep its foot on the monetary policy gas pedal even longer than currently expected.
Last week the U.S. central bank indicated it would leave short-term interest rates near zero until unemployment fell to at least 6.5 percent, as long as inflation does not threaten to rise above 2.5 percent.
It has also pledged to keep buying long-term securities unless the outlook for the labor market improves significantly.
An unprecedented drop in the percentage of the working-age population that is in the labor force has been the biggest factor behind the fall in the unemployment rate to 7.7 percent last month from a peak of 10 percent in October 2009.
The labor force participation rate is hovering near a 31-year low, a function of both poor labor market conditions and baby boomers going into retirement.
About 6.9 million people say they are out of the labor force but want a job and some of them could reenter the jobs market if economic conditions improve significantly.
The San Francisco Fed’s paper said that based on historical averages, about 2.1 million could enter the jobs market.
If they moved back into the labor force over 1-1/2 years, the jobless rate could top 8 percent into 2014, it said in an analysis published in the San Francisco Fed’s Economic Letter.
That’s higher than the most pessimistic forecast from all 19 Fed policymakers, which puts unemployment at 7.8 percent by the fourth quarter of 2013.
“The unemployment rate could stay around 8 percent as late as mid-2014, despite continued job growth,” wrote Mary Daly, associate director of research at the San Francisco Fed. “A stall in reducing the unemployment rate would undoubtedly be viewed as a significant disappointment.”
If discouraged workers take 3-1/2 years to return to the labor force, the unemployment rate could still be at its current 7.7 percent at the end of next year, the analysis showed. All projections are based on the assumption that jobs continue to be created at the same pace they have been over the last two years.
If none of the 2.1 million were to enter the labor market, the unemployment rate would fall to 7.4 percent by the end of next year. The economy added about 1.8 million jobs last year and employment growth this year has averaged 151,000 jobs per month.
Monday’s analysis, which was co-written by Bart Hobjin, Early Elias and Oscar Jorda, suggests that even though the return of job seekers to the labor force is a sign of a strengthening economy, a resulting rise in the jobless rate could undercut that vitality.
“Progress in reducing the unemployment rate is a key factor in keeping consumer confidence and spending high enough to sustain recovery,” the researchers said.