The unemployment rate has been falling precipitously over the past several months, from 9.1 per cent last summer, to 8.3 per cent as of the January reading.
There’s a good chance it will fall to 8 per cent or lower very soon.
But the unemployment rate these days always seems to carry with it an asterisk, because detractors like to point to this number: The Civilian labour Force Participation Rate.
The number of people involved working or looking for a job just keeps falling as a percentage of the overall population, so they say the unemployment rate is a foul number, distorted by the fact that in this economy, so many people have just given up.
James Pethokoukis at AEI has argued that the “real” unemployment rate is actually 11 per cent, a number that would make Obama’s economic record look really dismal.
And though Pethokoukis generally writes from a conservative angle, we should note that it’s actually not just an anti-Obama thing. Lots of people from across the spectrum worry that the official Unemployment Rate is bunk, and that it’s masking a much deeper jobs crisis.
All that being said, people are aware that there are two sides to the question.
Part of it is, as Pethokoukis would argue, is people have given up attempts to find a job completely, and are apparently planting themselves on the couch of a relative, or just burning through their savings or doing whatever they can do to survive without income.
But there’s also a demographic component.
Back in December, Bill McBride at Calculated Risk pointed out that Great Recession aside, demographers had already been calling for a decline in the participation rate.
This chart plots the current participation rate against predictions that were made by researchers in 2002 and 2006.
Photo: Calculated Risk
As you can see, the decline in workforce participation was never in doubt, so if you’re trying to calculate the “real” unemployment rate simply by holding the participation rate fixed from some point in time, you’ve already erred.
All of this is a long way of getting to the fact that Barclays economists Dean Maki, Troy Davig, and Peter Newland have a brand new paper called Dispelling An Urban Legend, which blasts the idea that labour force participation is mostly being dragged down by depressed workforce exiles. Instead it’s really mostly about the demographics.
Specifically, they write:
Consistent with our view, only a third of the drop in the labour force participation rate is accounted for by those who say they want a job, and only about 15% by those who want a job and are also of prime working age (ie, 25-54). Thus, we view the possibility of a large and sudden return of previously discouraged job seekers to the labour force as remote.
Why are Maki, Davig, and Newland so confident that this is really a demographic story?
A really big part is this chart:
As a share of the total population, those aged 55 or older have jumped by nearly 5 per cent in a decade. The big loser demographic was the 35-44 year old cohort, which is the prime working age population, and which saw its share of the population drop 4 per cent.
Still, how do we know that the people who have left the workforce don’t really want to get back in?
Well, the BLS asks them: DO YOU WANT A JOB? And the vast majority say: NO.
From Barclays again:
Data from the Bureau of labour Statistics (BLS) that tracks individuals “not in the labour force” supports our view that structural factors are the primary explanation for the decline in participation, as it suggests that the majority of those not in the labour force do not want a job. Figure 8 illustrates this point (note that all numbers are expressed as a percentage of the civilian population (ie, 16 and over). The labour force participation rate fell by 2.1pp between Q4 2007 and Q4 2011. Of this, 1.4pp reflects those who no longer want a job and 0.7pp who do want a job; this provides a proxy for how much of the decline in labour force participation has been “structural” (ie, permanent) and how much has been “cyclical” (ie, temporary). In turn, of those who no longer want a job, more than half of the increase in the share of those not in the labour force has been in the 55+ age cohort.
Of those who dropped out of the labour force since Q4 2007, only 34.5% are classified as wanting a job, and only 14.7% want a job and are of prime working age (ie, 25-54). We see the 0.7pp rise since Q4 07 in those workers who are not in the labour force, but have said they want a job, as consistent with the current cyclical gap we estimated in the previous section. The fact that the majority of those who fall in the “no longer want a job” category are in the 55+ age bracket suggests a significant move into retirement. This is consistent with the rise in the proportion of the population receiving social security benefits for retired workers.
They go into things a lot more, with all kinds of econometrics, but the bottom line is: There’s been a big demographic shift, and most of the people who have left the workforce do not want a job. Yes, the phenomenon of labour force exile is real, but not enough to discount the improvement in the jobs market.