Labor Participation Rate Plummets

To the casual observer, the most recent jobs numbers report may seem to indicate that the the economy is moving in the right direction.  After all, the reported unemployment rate dropped a tenth of a percentage point to 7.6%.  Compared to the recession level era of around 10% this seems like a remarkable improvement.

However, as with all aggregate measurements, the statistic is only as useful as the underlying components of its deriving equation are reflective of reality in the real world.  Any aggregate number like the unemployment rate, GDP, or the consumer price index can only be useful gauges of the economy if you really understand what the final number that is spit out of an equation actually represents.  In the case of the modern calculation of the unemployment rate, it is a reflection of the percentage of people who are currently actively looking for any type of employment and have been unable to find any work.  The official government (U3) measure of unemployment does not take into consideration people who are currently only employed in part time work but require full time employment, or people who have simply stopped searching for a job because they had not had any success in the past.  This second part is reflected in what is called the labor force participation rate, and in the most recent jobs report that statistic dropped to a 34 year low of only 63.3%.

Not taking this type of measurement into account allows for a jobs report where only half the number of new jobs that were expected were actually created to lead to a decrease in the overall unemployment rate.  The decrease is driven fully by fewer and fewer people actually searching for jobs, not any level of measurable economic growth.

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2 thoughts on “Labor Participation Rate Plummets

  1. Geez. The important thing for people to remember is that your categorization as “unemployed” is only useful in determining if you are eligible for unemployment benefits. It is not a good metric for the health of the economy. Even though it’s hard to feel sorry for people who aren’t putting in the effort to find a job, it is still a bad sign for the economy when they stop looking for work.

  2. You hit the nail on the head, Aaron. None of these aggregates are true or exhaustive representations of “the economy” (whatever that really means). While each may be useful in certain circumstances each is constrained by the fact that it is merely a mathematical equation. They all consist of variables that were chosen by people for a specific reason; they are not divinely-granted statistics that offer infallible information. I think it is common for people to see these numbers as wholly accurate, but they clearly aren’t. The economy is far too complex to be able to be summed up in a few pithy equations. The belief that this is possible is what F.A. Hayek labeled “the fatal conceit” of Keynesians.

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