Things Are Seldom What They Seem

On the surface, today’s employment report appears modestly encouraging: Unemployment fell 0.1 percentage point to 7.3 percent. However, appearances can be deceiving. Unemployment fell only because people who are not looking for work don’t count as unemployed.

In August, the household survey found that a half-million Americans had stopped looking for work. As a result, the BLS reported fewer unemployed workers — and also fewer people with jobs. Labor-force participation has fallen to its lowest level in 35 years.

Demographic changes can explain part of this; the Baby Boomers are aging and starting to retire. Of course this decreases labor-force participation regardless of economic conditions. But such factors cannot explain the enormous numbers of Americans who have dropped out of the labor force since the recession began.

In a new Heritage Foundation report I analyze the decrease in labor-force participation between 2007 and 2012. The table below shows my main findings.

Demographics accounts for only one-quarter of the drop in labor-force participation during that time; the weak economy accounts for the rest. Millions of Americans have stopped looking for work, which makes the headline unemployment numbers an unreliable guide to the state of the labor market.

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