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  Is the unemployment rate lower than it should be?
Posted Under: Data Watch • Employment

 
Is the unemployment rate lower than it should be? Ben Bernanke is incredulous; He argues that unemployment has fallen more than GDP suggests it should have. Others suggest that declines in the labor force are artificially reducing the unemployment rate.

So, while no one denies that private sector jobs have grown for 26 consecutive months, they argue that this doesn't matter because the labor force participation rate (LFPR) has fallen to 63.6%, its lowest reading since 1981. This low reading is a combination of two things – a flattening in the labor force and a growing population. If the LFPR were at the pre-Obama, or pre-recession peak, the unemployment rate would be significantly higher, possibly 11%.

While we will not argue with the math – the unemployment rate really would be higher if the labor force were bigger – we do argue with the conclusion. The US economy is much better than an unemployment rate of 11% would suggest and the decline in the LFPR is not a "new" development.

The LPFR has been trending down since 2000 (see chart). There are three reasons for this. First, the population is aging and as it does a smaller percent of the population is in the workforce. Second, the peak in 2000 was partly due to the dot.com bubble, but also a huge reduction in government spending relative to the economy. Third, the female participation rate reached a peak after climbing for more than 30 years.

The most important reason is the aging population. In 1975, the total US population grew by 1%, while the population of those 65+ years old grew by 2.9%. In 1999, the 65-years-or-older age group grew just 0.5%. Since then the population has been aging rapidly and in 2012 (65 years after 1947), the 65+ cohort will grow 3.5%, while the population grows just 0.9%.

As the chart shows, this trend in the number of people 65+ years old is a mirror image of the labor force participation rate. The participation rate is falling as the number of people who reach retirement age rises. It's not a mystery. Moreover, because people are living longer these days, the share of that older population continues to increase relative to historical norms. In other words, all this fretting about the LFPR is overdone. The population is aging...that's the number one thing driving this data.

Posted on Friday, May 11, 2012 @ 1:50 PM • Post Link Share: 
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