The Corner

The Unemployment Rate in Perspective

The unemployment rate has fallen to 8.9 percent. One reason is that the private sector added some 192,000 jobs to the economy in February. However, these numbers do not tell the entire story. This chart is based on Congressional Budget Office projections of the United States labor force (the segment of the population working or in search of work). The blue line plots the proportion of the adult population in the labor force, or the labor force participation rate, from 1965 through CBO’s 2021 projections.

Today’s share of adults who are working or actively looking for a job is at its lowest in 25 years. That means that a portion of the decrease in unemployment rates can be explained by the fact that people are exiting the labor market and not exclusively by the fact that the private sector is adding jobs to the economy.

What’s more, between 2011 and 2021, the proportion of the United States population working or seeking work will decline from 64.7 percent to 63 percent — a level not witnessed in this country since 1978. These future decreases in the labor force participation rate are more dramatic when viewed in the larger historical context: Even now, labor force participation has fallen from its 2000 peak of 67.1 percent. Note that both population and the labor force are projected to grow through 2021, but the rate of population growth will significantly outpace that of the labor force.

This shift is often explained by the recent crisis and the lack of job prospects. In recent years, an increasing number of Americans have given up on working or on even looking for a job. They are either waiting for better economic conditions, staying at home, retiring earlier than they were planning to, going back to school hoping for better job prospects, or raising children. Very likely, when the confidence in the economy is restored these people will reenter the workforce. The impact this increased participation will have on the unemployment rate will depend on whether or not jobs are created fast enough to absorb these new job seekers. 

However, this shift could also be driven by an aging and retiring population. As more and more Americans transition out of the workforce and into Medicare and Social Security, reform becomes increasingly imperative; recall that the Social Security trust funds are filled with IOUs, not cash, and that Medicare premiums only cover roughly 20 percent of total enrollee costs — the major future burden for these programs will fall on working American taxpayer.

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