The illusory jobs recovery

The unemployment rate has fallen in recent years largely because so many people have left the labor force. The labor force participation rate (the percentage of the population considered to be part of the labor force) was 63.6% in December 2012, unchanged from November and down 0.4 points from December 2011. This decline is responsible for about six-sevenths of the decline in the unemployment rate in 2012, or 0.6 points off the 8.5% rate the country faced in December 2011. Only one-seventh of the decline can be explained by actual growth in employment. Without this drop in labor force participation over 2012, the unemployment rate would be 8.4%.

Such a phenomenon is not unique to this year. This declining labor force participation rate has been a hallmark of the current recovery and the driving force behind the improving unemployment rate. The peak unemployment rate was 10.0%, reached in October 2009. It has since fallen 2.2 points, to 7.8%. However, more than 90% (2 points) of this drop is due to a 1.4-point drop in the labor force participation rate, from 65.0% to 63.6%. Without this drop in the labor force participation rate, the unemployment rate would be 9.8% today. During this same period, the number of people the government reports as “not in the labor force” but who “want a job now” has increased by 746,000, or 12%. Were the labor market improving, this number obviously would be decreasing. So claiming that the job market is in recovery is simply wrong. The economy may have stopped shedding jobs, but it has yet to stop shedding workers.