Unemployment Is Down Because Fewer Americans Are Looking for Work
September 11, 2014
The recession officially ended in June 2009, yet unemployment remained high. The unemployment rate was 10 percent in October 2009 and did not drop below 9 percent until the end of 2011. Finally, in May 2014 -- five years after the recovery began -- the unemployment rate reached its pre-recession peak of 6.3 percent. As outlined in a report from James Sherk of the Heritage Foundation, it is the slowest recovery in 70 years.
According to Sherk, the fall in the unemployment rate during the recovery is almost entirely due to the huge drop in labor force participation that has taken place:
- The labor force participation rate is a measure of American adults who are working or looking for work. That rate has fallen by 3.2 percentage points since the beginning of the recession, meaning that fewer adults are employed or seeking employment.
- The unemployment rate, however, only counts as unemployed those Americans who are out of work and actively looking for a job.
- This means that the official unemployment rate can fall, even as more Americans drop out of the labor force, because those discouraged workers are not counted as unemployed.
Because of the way that unemployment is measured, the falling unemployment rate overstates the health of the American labor market. As Sherk writes, "Unemployment has fallen because fewer Americans are looking for work, not because more Americans are finding jobs."
Why are Americans dropping out of the labor force? There are a number of potential factors at work. While baby boomer retirements should lower the labor force participation rate, explains Sherk, higher education levels (which younger workers today generally have compared to older generations) should raise the rate. Analyzing Bureau of Labor Statistics data, Sherk found:
- Baby boomer retirements account for less than 25 percent of the drop in labor force participation -- the rest is due to the weak job market.
- Many of those no longer looking for work have begun collecting disability benefits. Since the beginning of the recession, the number of Americans collecting disability payments has risen by 2.1 million. Today, over 6 percent of adults collect Social Security Disability Insurance.
- School enrollments are also up since the recession, as many workers unable to find jobs in the weak economy have turned to higher education.
Sherk encourages Congress to pass corporate tax reform and reduce regulatory burdens on businesses. According to small business owners, taxes and regulations are a much greater problem than weak sales.
Source: James Sherk, "Not Looking for Work: Why Labor Force Participation Has Fallen During the Recovery," Heritage Foundation, September 4, 2014.
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