High Unemployment the New Normal

May 16, 2012

Last month the government said that 8.1 percent of the American workforce was unemployed, down from 9 percent in April 2011.  However, this is largely a hollow victory: much of the decrease in unemployment is due to discouraged workers dropping out of the workforce entirely by no longer seeking jobs, says Anthony Randazzo, director of economic research at the Reason Foundation.

  • In April 2012, labor force participation was 63.4, the lowest rate since January 1981.
  • This means that while unemployment has fallen from its high mark of 10 percent in October 2009, the percentage of Americans in the job market has also fallen from 64.9 percent that same month down to 63.4 percent 30 months later.
  • If we were to assume that the labor force was the same today as it was in April 2011, then the unemployment headline figure would have printed at 8.9 percent for the last month.
  • We could apply the same logic and estimate that if labor force participation were at the pre-recession April 2007 levels, then the unemployment rate would currently be 11.1 percent.

Dishearteningly, these trends are nothing new: labor force participation has been declining for more than a decade, thereby undermining economic growth.  This loss of growth makes firms wary of hiring, contributing to higher unemployment.  And this loss of job prospects further encourages workers to drop out of the workforce.  Thus, a circular pattern is born.

Underlying these trends and explaining much of the loss in workforce participation are two gradual changes over the past few decades: the dropping off of female gains in workforce participation, and decreases in population growth.

  • According to the Bureau of Labor Statistics, the growth rate of the U.S. population has been cut in half since 1960, going from 1.64 percent to 0.85 percent in 2012.
  • Female labor force participation peaked in the early 1990s at around 59 percent and then flatlined for two decades before taking a slight decline in 2011 to 57.7 percent today.
  • Researchers have argued that if women had been giving birth to more babies and at the same time working more, U.S. gross domestic product could be as much as 1.2 percent higher today.

The loss of these compelling factors will likely result in a lower normal unemployment rate.

Source: Anthony Randazzo, "High Unemployment the New Normal," Reason Magazine, May 10, 2012.

For text:

http://reason.com/archives/2012/05/10/high-unemployment-the-new-normal

 

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