Much has been made of the recent drop [1] in the unemployment from its highs during the great recession to the where it currently sits at 6.1 percent. But the often untold story in the headline is the effect that the labor force participation rate has on the unemployment rate and the overall economy.
Put simply, the conventional unemployment rate is only a measure of unemployment within the segment population that is a part of the labor force, defined as people who are employed or actively looking for work. People who fall outside of that definition are not a part of the active labor force and fall outside of conventional unemployment measurement. But make no mistake; a lower labor force participation rate is a sign of a troubled job market.
A report [2] released Thursday by the White House Council of Economic Advisors [3] points to a number of factors that lead to the conclusion that the labor force participation rate is unlikely to return to the past levels it enjoyed before the economic downturn any time soon – and maybe never again.
According to the report, since the final quarter of 2007, the labor force participation rate has fallen from 65.9 percent to 62.8 percent in the second quarter of 2014, a decline of 3.1 percentage points and a drop to nearly the lowest level seen since the 1980’s.
The council pointed to a number of factors depressing the number.
The main culprit is the fact that the United States population is aging. As baby boomers retire and live longer than prior generations, it's only natural it makes perfect sense that a greater portion of the U.S. population would not be active in the job market. The report suggests that more than half of the drop in participation is due to the aging population.
Surprisingly the report downplayed the effect of the financial crisis on the participation rate attributing only 0.5 percent to workers that have voluntarily left the work force because of discouragement, returning to school, or some other reason.
The rest of the decline is attributed to a number of trends, including historical patterns that were in place before the downturn.
Whatever the reason, the anemic labor force participation rate is a cause for concern going forwar. Since the baby boomer generation, the population share of each successive generation continues to shrink. That fact and the historical trends that are likely to continue paint a grim picture.
Policy makers will have to be creative in their approach to confronting these issues.