Is Unemployment Down, or Is It a Decline in Labor Participation?

In the month of April 2012, the national unemployment rate dipped to 8.1 percent, continuing a steady decrease through the year, and providing optimism for economists. However, when analyzing economic trends, one must take all factors into account. It is true that the unemployment rate has fallen, but it is possible that much of this is due to a decreasing number of people in the labor force. In conjunction with the fall in unemployment rate during April, the labor force participation rate, which measures how many people are either working or looking for work out of the total population of civilians age 16 and over, dipped to a new 30-year low of 63.6 percent during the month.

This stands in stark contrast to every other post-World War II expansion, when labor force participation increased by millions during economic recoveries, even as unemployment rates were driven down. Now, despite a growing working-age population, the labor force has about 365,000 fewer people than in June 2009, the month the economic recovery officially started. Why would individuals in the civilian population not want to be in the workforce? Discouraged job seekers, frustrated by their lack of success in finding employment, are often tempted to leave the labor market entirely and pursue an education, or they simply bide their time until more opportunities open up. People between the ages of 16 and 24 usually have low participation rates due to the fact that many of them are in school and are not seeking employment. Also, people above the age of 55, the Baby Boom generation, have low participation rates due to many of them retiring. The April decline in labor force participation is particularly telling.

According to the Federal Reserve Bank of Atlanta, if the labor force participation had remained at the March levels, the unemployment rate in April, which counts only people in the labor force actively looking for work, would have been at 8.4 percent. Despite these troubling statistics, maybe things are not as bad as they seem. The civilian population is steadily increasing relative to the number of people in the labor force, so naturally, we cannot expect a major increase in participation rate. The male labor force participation rate has been steadily decreasing since reaching a high of 87.4 percent in 1949, all the way down to 70 percent in April. One possible explanation for this is that increasing life expectancy over time leads to increases in the civilian population relative to the number in the labor force, which does not increase as steadily.

The Bureau of Labor Statistics calculates labor force participation rate as the number of people in the labor force divided by the total civilian noninstitutional population aged 16 and over. Thus, as life expectancies continue to rise, we can be sure that the civilian population will continue to increase, while the number in the labor force would not be increasing as fast, and could perhaps even be decreasing due to the retirement of aging workers and younger workers being squeezed out of the job market. Nevertheless, we cannot be too optimistic about the reported decrease in national unemployment rate in the month of April 2012, since part of it is due to a decrease of the number of people in the labor force. In addition to those outside the labor force, there is also the problem of people that have been forced out of their preferred fields and are taking lower-paying jobs outside their discipline. While their plight is not shown in the unemployment figures, these individuals would hardly consider themselves to be gainfully employed. Discouraged workers need to keep the faith and renew their job search efforts afresh. America’s Job Exchangecan help.

References http://www.governing.com/blogs/by-the-numbers/Labor-Force-Participation-Declines-in-States-Inflates-Jobless-Rate.html http://seekingalpha.com/article/564831-decline-in-labor-force-participation-reflects-demographics-may-not-be-as-bad-as-reported http://www.bloomberg.com/news/2012-02-08/jobless-decline-masks-drop-in-u-s-labor-force-as-fewer-seek-work-economy.html http://blogs.wsj.com/economics/2012/05/16/fed-debates-falling-labor-force-participation/?mod=google_news_blog

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