Tuesday, August 5, 2014

Drop in unemployment due in large part to workforce dropouts

Every is patting themselves on the back when it comes to the drop in unemployment. The media is crowing about the low unemployment level.  But, as always, things are more complex than they appear. A large amount of the improvement in the unemployment rate is due to workers dropping out of the labor market as measured by the Labor Force Participation (LFP) rate.  When the recession was at it's peak, people simply could not find work and stopped looking.  Now, just as some of those workers return to jobs, retirees are heading for the door.  All this means the LFP will continue to stay low.

During the "good times" from 1991 to 2003, the Labor Force Participation (LFP) rate averaged about 66.7%. That is about 67% of the population were considered part of the labor force. At the beginning of the Recession (December 2007), the LFP was 66% and as late as November 2009 the figure was 65%. Now, after the current recession, only 63% of the people in the US participate in the labor market. This means that over 9 million workers are "missing" from the pool of would be workers. 

Let's look at the current Labor Force Participation since the start of the recession in December 2007. 

The chart below adds the "missing" workers back to the the total number of unemployed. The workers are missing because of the low participation rate.  Using this new figure, the unemployment rate is still about 12%.  And the unemployment rate peaked at 13% during the recession.

Version 3

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