At Philadelphia Works Inc., a non-profit that connects employers to prospective employees, Meg Shope Koppel is seeing more Americans seeking help.

There “really is a pick-up in the number of people dedicated to finding a job,” said Koppel, a senior vice president for the agency. “A lot of people who fell out of the labor market” are looking.

As a reviving economy coaxes Americans back into the job market, the supply of labor will expand about 1.2 percent this year, after increasing 0.8 percent in 2012 on a fourth quarter over fourth quarter basis, said Robert Mellman, a senior economist at JPMorgan Chase & Co. in New York.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

In the short run, the larger labor force will have an unfortunate side effect: It will slow the fall in unemployment. Mellman sees the jobless rate dropping to 7.5 percent by year- end from 7.9 percent now. It fell 0.7 percentage point in 2012.

In the longer run, a bigger supply of labor is good news because it swells the pool of Americans available and willing to work, enhancing the economy’s potential to grow, according to Julie Hotchkiss, a policy adviser at the Federal Reserve Bank of Atlanta.

It also has a silver lining for investors. The gradual fall in unemployment will allow policy makers to keep monetary policy looser for longer without having to worry about igniting a wage- driven rise in inflation.

‘Very Accommodative’

“The Fed is going to be very accommodative over the next couple of years in order to nurse the economy back to higher levels of employment,” said Jan Hatzius, chief economist at Goldman Sachs Group Inc. in New York.

He sees the central bank continuing to buy debt at an $85-billion-per month clip in 2013 and then extending its purchases through next year, albeit at a reduced pace. The Fed’s first interest-rate increase won’t come until the beginning of 2016, when unemployment finally dips below the central bank’s threshold of 6.5 percent, he said. Policy makers have held their benchmark rate at a record low since December 2008.

Edward Yardeni, president and chief investment strategist at Yardeni Research Inc. in New York, describes it as a “Goldilocks” economy: not too hot to get the Fed worried about inflation and not too cold to have investors fretting about a relapse into recession. He sees the Standard & Poor’s 500 Index rising to 1,665 by the end of the year from 1,519.79 at 4 p.m. on Feb. 15.

Goldilocks Economy

“Goldilocks has the run of the house right now,” Yardeni said. “The bears haven’t come back.”

Fed Chairman Ben S. Bernanke and his colleagues have vowed to continue buying Treasury debt and mortgage-backed securities until the outlook for the labor market improves “substantially.” The central bank hasn’t spelled out what that means because “we ourselves don’t know precisely what would define a substantial improvement,” Bernanke told reporters on Dec. 12.

Policy makers have been more definitive when it comes to setting out the criteria that might lead them to raise interest rates. The Fed currently has a zero-to-quarter-percentage-point target for the federal funds rate, which commercial banks charge each other for overnight loans.

The Federal Open Market Committee said in December and again in January that this “exceptionally low” rate is appropriate as long as inflation isn’t forecast to rise to more than 2.5 percent and unemployment stays above 6.5 percent.

2015 Advance

Forward markets for overnight index swaps, whose rates show what traders expect the federal-funds effective rate will average over the life of the contract, signal a quarter percentage-point advance around February or March of 2015, according to data compiled by Bloomberg as of Feb. 15.

The unemployment rate has fallen from a 26-year high of 10 percent in October 2009 to last month’s 7.9 percent, Labor Department data show.

Much of that drop was caused by a contraction in the work force rather than an increase in employment. The labor-force participation rate -- the proportion of Americans ages 16 and older who are working or seeking work -- declined to 63.6 percent last month from 65 percent in October 2009 and 66 percent at the start of the last recession in December 2007.

Structural and cyclical forces are at play. As workers get older, they’re more prone to retire and drop out of the labor force. The number of Americans ages 65 and older increased to 41 million in 2011 from 35 million in 2000 and is projected to rise to 48 million in 2015, according to the Census Bureau.

Sidelined Workers

Even so, the weakness of the economy has been far more important in driving workers to the sidelines during the last five years, according to the Atlanta Fed’s Hotchkiss.

Now, after more than 3 1/2 years of expansion, that may be changing, as Americans re-enter the job market to take advantage of growing opportunities. In the last three months, the labor- force participation rate has held steady at 63.6 percent on a seasonally-adjusted basis.

“We are seeing some people come off the bench,” said Jeff Joerres, chairman and chief executive officer of ManpowerGroup, the Milwaukee, Wisconsin-based staffing company. “But there’s still a lot of hesitation because we don’t have a robust jobs market.”

He voiced concern that many of those who’ve been out of work for a while will find it hard to land a job because they haven’t kept up their skills.

Little Progress

“We don’t think there will be a further decline in participation” this year, said Mary Daly, a group vice president at the San Francisco Fed. As a result, “we don’t see a lot more progress in reducing the unemployment rate in 2013.”

Joblessness will drop to 7.5 percent by December and 7 percent by December 2014, according to economists at the regional Fed bank. The cumulative 0.8 percentage-point decline they foresee this year and next follows a 1.5-point reduction in the past two years.

About 6.6 million Americans described themselves as wanting work in 2012, even though they had given up actively searching and weren’t counted as part of the labor force. That was up from 6.4 million in 2011, Labor Department data show.

Daly reckons that about 1.8 million of these people could enter the job market as the economy continues to improve and work opportunities increase.

Research by Hotchkiss and her colleagues at the Atlanta Fed found that a greater proportion of Americans had left the labor force to pursue their education during the last five years than in the past. That’s important because they’re among those most likely to re-enter the market.

New Skill

Take 37-year-old Axabas P. James. After losing his job as a project manager at the Vanguard Group in 2010, he decided to go back to school to learn a new skill.

Armed with a master of philosophy in leadership dynamics from the University of Pennsylvania, the Philadelphia resident landed a position last month. He’s now a business-services representative at JobWorks Inc., where he helps with job placement.

“Many people who were looking for jobs at the height of the recession became so discouraged that they dropped out of the search, because they felt as if there was no hope,” James said. “I think I’m an example that by sticking with it, you can definitely find something.”

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible