America’s unemployment rate is calculated simply. It’s the gap between the number of employed Americans and the labor force of Americans that could be employed. Two phenomena can reduce the unemployment rate: job growth in excess of population growth, or a declining share of Americans telling a government survey that they are participating in the labor force in the first place.
Since the end of the last recession, in June 2009, the unemployment rate has appeared to drop from 9.5 percent to 5.4 percent. But the entire drop came from declining labor force participation. None came from the faster-than-population-growth job growth that is expected and required of an economic recovery.
Between 2009 and 2015, the number of Americans participating in the labor force dropped from 65.7 percent to 62.8 percent. This represents the statistical disappearance of seven million potential workers, who have given up looking for work or chosen to retire. If the June 2009 participation rate of 65.7 percent were used today — if those seven million missing workers were counted among the unemployed rather than ignored entirely — the unemployment rate today would be 9.6 percent.
Looked at another way: Since June 2009, population has grown by 6.2 percent, but the number of jobs has grown by only 6.1 percent. Job growth has been slower than the population growth rate required simply to hold steady the miserable end-of-recession status quo that had just seen the loss of six million jobs.
Some economists argue that many of those seven million missing workers left the labor force not because of poor economic prospects, but rather because of demographic changes, namely the retirement of the baby boomers. The White House, for instance, suggests demographic changes account for half the decline.
But the federal government’s own predictions refute that excuse. Back in 2004, the Congressional Budget Office projected that the participation rate in 2014 would be 66 percent; the Bureau of Labor Statistics projected a 2014 rate of 65.6 percent. Obviously, the rate of aging has not accelerated in the interim.
Other countries also undermine the claim. Between 2009 and 2012, World War II-Allied countries with baby booms most like America’s — Canada, Australia and New Zealand — saw little to no decline in participation.
One reason that retiring baby boomers cannot explain the declining participation is that a wave of retirements should trigger responses elsewhere. In a healthy economy, wages should rise and pull others into the labor force as baby boomers exit. Instead, wages have remained distressingly stagnant and the exit of other cohorts has itself accelerated.
The labor participation rate for people ages 25 to 54 has fallen faster in the six years since the recession ended in 2009 than it did in the prior 10 years since its 1999 peak. The rate of decline for those over age 25 with only a high school degree has more than tripled, falling five points in six years and continuing to accelerate year over year. The so-called “recovery” has compounded rather than alleviated the trends, leaving the labor market today in a crisis at least as severe as at the recession’s height.
This trajectory cannot be accepted as a new normal, as a recent Federal Reserve report tried to do. It will bring with it higher rates of poverty, expanding safety net programs and slower gross domestic product growth.
Because metrics dictate behavior, reports on the labor market must use the numbers that reflect reality. The official unemployment rate instead makes each dropout from the labor force as great a success as a new hire and depicts a “recovery” that never occurred. Only if held directly to the job growth rate, or to an unemployment rate that back-dates labor force participation to the end of the recession, will policymakers focus on the economic growth and job creation that the economy still needs. The unemployment rate today is nearly 10 percent; what are we doing about it?