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The depressing reality of ‘the recovery': Americans aren’t getting jobs. They’re retiring.

For most of his presidency, President Obama has been focused on the economic short run — which makes sense, given that he took office in the midst of the biggest recession since the 1930s. With his big economic speech today, he's shifting to the long-run, talking about the structural changes he thinks the economy needs to see for the U.S. to prosper going forward.

But anyone who thinks that the short-run battle is over should take a look at a new report by Daniel Alpert over at the Century Foundation. Alpert notes that while the headline unemployment number is well below its recession-era peak, that's almost 100 percent due to declines in the labor force participation rate — that is, the share of the population that's either employed or actively looking for work. Don't believe him? Take a look at this chart:

The dotted red line is the U-3 unemployment rate, or the number you see everywhere. It can go down for one of two reasons: either more people are working, or fewer people are in the labor force. So which is it?

You see that solid blue line? That's the employment/population ratio, or the number of employed people divided by the civilian noninstitutional population (aka everyone over 16 who's not in prison, a mental institution, the military, or a nursing home). It's barely changed since the nadir of the recession. The share of adults who are working isn't going up; it's stagnating. More people aren't working.

Now, look at the blue dotted line. That's the labor force participation rate. See how it nearly perfectly tracks the movements of the unemployment rate? That's a pretty good sign that people leaving the labor force, rather than getting jobs, is what's driving the latter down.

To drive the point home, Alpert calculates what the unemployment rate would be absent any decline in labor-force participation. Spoiler: it'd be right where it was during the worst of the recession.

So why is labor-force participation falling so much? As you may recall from Jim "The Tank" Tankersley and Ben Casselman's WonkFeud, about 20-25 percent of the decline is inevitable (see, for example, these two papers). The U.S. population is getting older, which means that fewer adults are going to be working and more of them are going to be retired going forward. That isn't an effect of the recession and it isn't really fixable through public policy, unless you want to get rid of retirement and wreak havoc on the golfing sector.

But that leaves 75-80 percent explainable either by the recession or by structural economic factors. And it seems likely that the former predominates. The Bureau of Labor Statistics estimated in November 2007 — before the recession hit — that labor force participation would decline by 0.3 points between 2007 and 2012. The actual fall was 2.4 points, a decline eight times that.

So if you adjusted the above graph to have labor-force participation fall at the rate the BLS projected, you'd probably see unemployment fall at least somewhat. But it'd be much more anemic progress than the official unemployment rate suggests. Obama may be thinking about the long-run, but the near-term economic picture is still very, very bleak.




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Timothy B. Lee · July 24, 2013

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