Lower unemployment rate due to smaller work force, not more jobs

Elizabeth Dorton | Contributor

A new report published by the Century Foundation shows that though the unemployment rate is going down, the decreasing numbers aren’t due to a spike in employment rates or job creation. Instead, more people are leaving the work force entirely.

The labor force participation rate is seeing a large decline. Rather than resulting in less unemployment because more people are becoming employed, there are simply fewer people to employ, The Washington Post reports.

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The dotted red line representing the U-3 unemployment rate, which is being touted as the recovery of the economy, shows that the unemployment rate is going down.

The solid blue line indicates the employment/population ratio, which is essentially everyone in the U.S. who is employed divided by everyone in the country who is technically available to work. That number has stayed static for the last three years.

The dotted blue line represents the labor force participation rate, showing that it has been in steady decline.

The decreasing unemployment rate is due to more people leaving the work force rather than more people getting jobs.

Decreased participation in the work force could be due to retirement numbers and those who have who have stopped searching for a job. The Century Foundation study shows that in 2010 during the height of the recession, the labor force participation rate stood at 65.09 percent, with the unemployment rate at 10 percent. At the end of Q2 in 2013, the labor force participation rate dropped to 63.46 percent.

If the unemployment rate were calculated at the 65.09 percent labor force participation level, U-3 would stand at 9.77 percent today, essentially the same it was before.

However, because the unemployment rate has dropped, the general consensus is that the American economy is on the road to recovery. Taking that logic to its full extent, we would have a zero percent unemployment rate if zero people participated in the work force.

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