Editor's note: This piece was co-authored by Michael Talent.
Last Friday’s jobs report was dismal. The labor force participation rate, that is, the percentage of the total population that is either working or actively seeking employment, dropped to 63.3%. That’s the lowest rate since May of 1979. Under Presidents Reagan, Bush and Clinton the labor force participation rate grew as high as 67.3% in April of 2000. All of that growth is now gone and the numbers are back to the lackluster growth and economic malaise that characterized the Carter presidency.
However, the “official” unemployment rate still ticked down to 7.6%. In light of this bizarre result, it is time to stop using the official unemployment rate as the principle means for measuring the labor market’s health.
This decrease in the unemployment rate was a direct result of the decrease in the labor force participation rate and nothing more. Fewer people actively seeking employment means the unemployment rate falls. This is because of how the Bureau of Labor Statistics calculates the unemployment rate. When people stop looking for work—because of, for example, a lack of jobs—the BLS subtracts them from both the labor force and the ranks of the unemployed. The net result is a decrease in the unemployment rate. So the more people who give up participating in the work force, the more the government will report that unemployment has declined.
To understand the participation rate’s effect on the “official unemployment rate,” look at the impact of keeping the rate constant over time. The unemployment rate peaked in October 2009 at 10.0%. Since that time, the labor force participation rate has dropped 1.7 points from 65% to the current 63.3%. Holding the participation rate constant at its October 2009 level of 65% would produce an “official” unemployment rate today of 10.0%, identical to the “official” rate in October of 2009. So, the entire improvement in the unemployment rate since October of 2009 is due to a drop in the participation rate. Rather than indicating an improving labor market, the decline in both the “official” unemployment rate and the labor force participation rate indicates a depressed and stagnant labor market.
It’s a sweet set up for those who are in power. They can say that unemployment is going down even as the labor market declines. If no one in the United States had a job, and everyone had given up looking for work—and the real unemployment rate was 100%—our government would tell us that the unemployment rate was zero.