Does a lower unemployment rate mean a better labor market?

The government’s latest jobs report offered both good news and bad news, reflecting an emerging reality of the nation’s economy.

The unemployment rate fell from 7.9 percent to 7.7 percent in November, the Labor Department reported Friday, its lowest level in four years. It has dropped more quickly in the past year than in any one-year period since 1995.

So much for the good news.

Even as the unemployment rate is making encouraging progress toward normalcy, it is less than clear that the same can be said about the labor market. That’s because the rapid improvement in the jobless rate is being aided by the large number of Americans who remain out of the labor force.

The labor force participation rate — a measure of the share of working-age people who either have a job or are unemployed and looking for one — remains near lows not seen since large numbers of women began entering the workforce decades ago. In November, the participation rate was 63.6 percent, nearly three percentage points below where it stood when the Great Recession began in December 2007.

Republicans have pointed to the shrinking rate to buttress their argument that repeated stimulus and other elements of President Obama’s economic policies are ineffective. “If the labor force participation rate were the same as when the president took office, the unemployment rate would be 10.7 percent,” Sen. John Barrasso (R-Wyo.) said Friday.

Liberals also have raised questions about the rate, though their aim is to get policymakers to apply more stimulus funds to get the economy going at full tilt.

Analysts agree that a recovery that has left 40 percent of the unemployed out of work for six months or more is discouraging many people from looking for a job. Some linger in college or graduate school. Some retire early. Others seek economic refuge on the disability rolls. All lower the rate of labor force participation.

But it is also true that the share of Americans in the job market is down because the nation is aging.

Last year, the oldest members of the baby-boom generation turned 65. Experts estimate that 10,000 boomers reach age 65 every day, a trend that will continue for two decades. By 2030, when all members of the boomers have reached that age, 18 percent of the population will be 65 or older — up from the current 13 percent, according to the Pew Research Center.

This demographic reality has profound implications for economic growth. It means that fewer people will be in the job market going forward, and economic growth will be slower.

Given that, it is reasonable to ask: How much of the current slump is attributable to fewer job opportunities, and how much reflects the reality of an aging nation?

Heidi Shierholz, an economist with the Economic Policy Institute, has studied this question. After examining the long-term labor force trends, she says job creation remains so weak that people are not being ‘”drawn back into” the market. She concluded that as much as two-thirds of the slump in labor force participation is due to the weak job market.

Writing in a policy brief earlier this year, she said: “It is unlikely the missing workers will enter or re-enter the labor market until job prospects are strong enough that they will not face months of fruitless job searching.”

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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