Labor Force Participation Rate Lowest In Three Decades, Though Despair Doesn't Explain It All

A man who declined to be identified walks past a business with an American flag in the window Tuesday, Jan. 24, 2012, in Mobe
A man who declined to be identified walks past a business with an American flag in the window Tuesday, Jan. 24, 2012, in Moberly, Mo. Many in this small town in central Missouri will watch the State of the Union address closely after struggling to create jobs and suffering from a down economy. (AP Photo/Jeff Roberson)

You might have heard that unemployment fell in August only because armies of the unemployed are despairing of finding work. The reality is more complicated -- but it's true enough that somebody should do something about it.

There's no doubt the August jobs report was not great. The economy isn't producing enough jobs to bring unemployment down quickly. The unemployment rate dropped to 8.1 percent in August from 8.3 percent, but not because a lot of people were finding jobs. The number of employed people actually fell by 119,000.

The unemployment rate is the percentage of people in the labor force who want work but can't find it. So sometimes the unemployment rate can shrink simply if the labor force shrinks. That's what happened in August, big time. The labor force shrank dramatically, by 368,000 people. The number of people in the labor force who are unemployed fell, too, though not by as much. Together, these two shifts pushed unemployment lower.

The labor-force participation rate -- the percentage of the civilian working-age population that is either working or looking for a job -- fell to 63.5 percent, the lowest since 1981. For men, the labor-force participation rate was the lowest on record, at 69.8 percent, notes Neal Lipschutz at the Wall Street Journal's Real Time Economics blog.

The majority's reaction to these numbers on Friday was that they were an awful sign, that the job market is so bad that hundreds of thousands of people every month are simply giving up in despair. We have growing numbers of people sitting around doing nothing, losing their job skills and their ability to buy stuff.

But a few economists pointed out that a lot of people are leaving the labor force for more benign reasons, like retiring or going to college.

"We have consistently held the view that the labor force participation rate would not rebound any time soon and its decline is mainly driven by the ageing (sic) of the population and the exit of the baby boomers from the labor market," Barclays Capital economist Michael Gapen wrote in a research note. "Therefore, the decline in the unemployment rate is not reflective of underlying strength in employment in this report."

The number of Americans the BLS says are "not in the labor force" has risen by 2.7 million in the past year, to 88.9 million. That sounds bad -- nearly three million people dropping out of the job market.

But of that 88.9 million, just a little less than 7 million people who are out of the labor force say they still want a job. That is a horribly high number. But it has only grown by 488,000 in the past year. In other words, of the 2.7 million people who have dropped out of the labor force in the past year, about 2.2 million of them say they're not interested in finding a job anyway.

And what are the majority of these 2.2 million people who don't want a job doing instead? Retiring, it seems. About 1.6 million people who have dropped out of the labor force in the past year are 65 and over, according to the BLS.

That leaves another 600,000 dropping out for other reasons besides retirement or an inability to find a job. Some could be teens going back to school -- the number of teenagers not in the labor force has grown by 245,000 in the past year. People could be going to college to get better skills. Unfortunately, we don't know for sure, because the BLS doesn't have a detailed breakdown of what people do when they leave the labor force.

But we shouldn't just assume that everybody dropping out of the labor force, or even most of the people dropping out, are doing so because they're simply discouraged. We just don't know that for sure.

Still, it is also entirely possible that many of the people who are retiring now are doing so before they were fully prepared to retire. They may feel pushed into an early, risky retirement because they think the job market is so lousy.

Felix Salmon, a blogger at Reuters, on Friday posted a chart of labor-market churn, showing that the number of people moving monthly from the ranks of the unemployed to the ranks of the not-even-trying-any-more has been unusually high since the recession. Though the majority of those people would appear to be new retirees, that doesn't mean they're happy retirees.

And ultimately, though it's possible to see shrinking labor force participation as not universally awful, we are clearly failing those 7 million people who have undoubtedly given up in despair, leaving the labor force even though they still want a job.

And though President Barack Obama proposed another stimulus plan to help -- a year ago Saturday, appropriately -- Congress has no interest in passing it, and Obama apparently has no interest in pushing it any further. Talk about despair.

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