Number of The Week: Accounting For Labor Force Dropouts

8.9%: The unemployment rate taking labor-force dropouts into account.

People dropping out of the labor force are making the unemployment rate look smaller, but not as much as some might think.

The jobless rate was reported to be 8.3% in January, marking the fifth consecutive decline. Some greeted the drop with skepticism, noting that the labor force — the number of people working or actively looking for a job — has declined and that is distorting the number.

The unemployment rate is calculated by taking the number of unemployed and dividing it by the labor force. When people stop actively looking for work because they get discouraged, it reduces both the number of unemployed and the size of the labor force. But there are other reasons why people leave the labor force, and the share of the population in the labor force has been steadily declining since 2000.

There are two issues leading to a longer-term shift in labor-force participation. One is that a growing percentage of the population is over 55 thanks to aging Baby Boomers and many of them are leaving the labor force forever, whether by choice or after a long spell of unemployment. The other is that the share of 18- to 24-year-olds looking for work has been steadily declining for years. So, while some of the decline in the labor force has been through discouraged workers giving up, a large portion of it has come from demographic factors that were in place before the recession.

That begs the question: “How much of the decline in the labor force is due to people dropping out and how much is due to demographic factors?” The Labor Department offers a decent proxy. The survey tracks people marginally attached to the labor force — people who aren’t counted in the official tally but would take a job if one was offered. In January, there were roughly 2.8 million people in this category.

But we can’t just add all those people back into the main number. Even in the healthiest labor markets there is a certain percentage of the population who are marginally attached. Right now about 1.8% of the population falls into this category. During more normal-times that level is closer to 1%.

If we take those marginally attached workers that would be in the labor force in better times, the unemployment rate is 8.9%. (credit, p, izzo, wsj)


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