Monday, September 16, 2013

The Importance of Labor Force Participation to Understanding Economic Recovery

Labor Economics Senior Policy Analyst, James Sherk, recently released a report for The Heritage Foundation that explains how the economy is not growing but shrinking.  Sherk notes that since the beginning of the recession in December 2007, the labor force participation rate (LPR) has fallen to historical lows.  Indeed, if we consider the LPR, along with the recorded unemployed Americans, the unemployment rate becomes much higher.

The LPR measures the number of working age adults in the labor market.  Sherk notes, “Since the recession began, the labor force participation rate---the proportion of adults either working or trying to find work---has fallen by 2.6 percentage points.”  When reporting the unemployment rate, the government only counts people who remain employed or are actively seeking employment.  Therefore, those individuals who have given up on their job search or left the labor market are missing from the unemployment rate.   As a result, the unemployment rate that makes the headlines is often only partially correct.

To be sure, many Americans are exiting the labor market because of retirement but this covers only a small fraction of the LPR.  Sherk notes that although some of the change is because of “demographic factors” it only accounts for “one-quarter of the decrease.”  Indeed, the “weak labor market” is primarily the reason that caused the “remaining three-fourths drop in labor force participation.”  Those who contributed to the drop include Americans, young and old, who have become dejected and given up looking for a job.

When considering the unemployment rate as a marker for economic growth and rejuvenation, it bears to keep in mind that the unemployment rate alone is hardly an accurate measure of our nation’s economic condition.  By counting only those individuals who are working (either full or part time), the unemployment rate dilutes the true state of the nation’s economy.  As Sherk’s report shows, the economy remains weak because there are few jobs and many more unemployed Americans.  Thereby, the actual economic state of our country is not a thriving economy but one where Americans remain unemployed and hopeless.   

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