NCPA - National Center for Policy Analysis

Why Unemployment Is Worse Than You Think

December 26, 2011

The current unemployment rate of 8.6 percent hides the extent of the economic crisis.  The widely quoted rate misses not only the underemployed and discouraged workers, but also major demographic factors.  The large demographic shift that has taken place over the last few decades -- driven by the maturing of the baby boom generation -- now places considerable downward pressure on the unemployment rate, which makes the current malaise look a bit better than it really is, say Ike Brannon, director of economic studies, and Matt Thoman, coordinator of economic studies, at the American Action Forum.

  • The unemployment rate, firstly, fails to account for the older generation of workers in the United States (predominantly baby boomers), who have an increased tendency to accept early retirement or buyout packages when faced with possible layoffs.
  • It also fails to incorporate the large swathes of potential young workers who choose not to enter the labor force due to poor prospects and elect instead to stay in school.
  • When these two factors are integrated into a more comprehensive measure of unemployment such as the Demographically-Adjusted Unemployment Rate (DOUR), it is found that real unemployment is probably closer to 10 percent than 8.6.

Given this information, America's prospects in emerging quickly and coolly from the recent recession and back to "natural" unemployment levels seem somewhat bleaker.  The nation may be on the cusp of having to accept a higher natural rate of unemployment, as it does not appear that the current rate of employment is moving rapidly towards its pre-recession levels.

It bears mention that this demographic effect that seems to suppress the unemployment rate by approximately 1 percent will wear off with the gradual retirement of the job-secure baby boomers.  At that time, more attention will have to be paid to transitioning younger workers into the job market and maintaining an adequate level of unemployment.

Source: Ike Brannon and Matt Thoman, "Why Unemployment Is Worse Than You Think," The American, December 13, 2011.

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