What Happens To The Unemployment Rate If You Add Back Labor Force Dropouts?
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What Happens To The Unemployment Rate If You Add Back Labor Force Dropouts?

The Department of Labor reported new jobs numbers this morning, and on the surface the results were encouraging: 288,000 new payroll jobs were created, and the unemployment rate fell to 6.3 percent from 6.7 percent. Below the surface, though, were some worrying numbers: namely, that the labor force continues to contract, to the tune of 806,000 more people.

Since the official end of the recession in June of 2009, the U.S. labor force participation rate has fallen by nearly 3 percent. As of April of this year, that number sits at 62.8 percent, matching its lowest level in decades. By way of comparison, the average labor force participation rate for the economy from 2001 through 2010 was 66 percent.

So what would today’s unemployment rate look like if the economy had the same labor force participation rate — 65.7 percent — as it did when the recession ended in June of 2009? What is the economic picture when labor force dropouts are added back? Not so good, it turns out:

Unemployment Rate With LF Dropouts 05022014

What causes that massive discrepancy? When people who are effectively unemployed abandon their search for work, they are removed by Labor Dept. beancounters from the ranks of the labor force, which means they are no longer counted as being unemployed. The result of that move is to artificially depress the headline unemployment rate, hence the large gap between the headline unemployment rate and the dropout-adjusted unemployment rate.

While the apparent recent decline in that dropout-adjusted unemployment rate is clearly good news, the continued decline in labor force participation is not, especially given the coming entitlement crisis, caused by large shifts in the ratio of those paying for benefits to those receiving them. And as that ratio falls — a byproduct of the labor force dropout problem — the entitlement funding problem only gets worse.

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