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Brooks Wilson's Economics Blog: Decline in the Labor-force Participation Rate

Thursday, January 14, 2010

Decline in the Labor-force Participation Rate

The economy has improved; growth has resumed, albeit slow growth, but little if any of the improvement seems to have reached labor markets.  The most encouraging news is that the 4-week moving average was 440,750, a decrease of 9,000 from the previous week's revised average of 449,750.  This average has been declining for nine months, and in the past, its decline has signaled an economic rebound.  As we all know, "Past performance is not necessarily indicative of future results."  The unemployment rate remains at 10 percent and the labor-force participation rate has been falling like a rock.  Christopher S. Rugaber, an AP writer, observes in "Economy 101: Dropouts Hold Down Unemployment Rate," (abc News/Money) that
Nearly 2 million Americans have dropped out of the work force since last May — and if they hadn't, the unemployment rate would have risen a lot more dramatically over the last several months.

Either way, joblessness is quite high. The Labor Department said Friday the unemployment rate remained at 10 percent last month, the same as in November and just below the 10.1 percent rate reached in October. The October figure, which was revised down from 10.2 percent, was the highest in 26 years.
Rugaber mentioned the unemployment rate, which is calculated by dividing the unemployed by the labor-force and, to convert a decimal to a percentage, multiplying by 100 (unemployed/labor-force*100).  If there is a one-to-one decline in unemployment and the labor-force, a drop in both results in a decrease in the unemployment rate.  He did not mention the labor-force participation rate, which is calculated by dividing the labor-force by the adult population and multiplying by 100 (labor-force/adult population*100).  It is one of the statistics used by labor economists to take the pulse of labor markets which are weak if workers exited because they became discouraged by bad job prospects.  CalculatedRisk estimates that
If the participation rate was at the same level as in July, the unemployment rate would probably be around 10.8%.

I have included a couple of graphs.  The first shows the labor-force participation rate during the last four recessions.  The second shows the deviation of the labor-force participation rate from its average during the recessions and perhaps adds more emphasis to changes in the rate.  The data in the graphs began three months before the National Bureau of Economic Research concluded that the recessions began and is denoted in both graphs with a red vertical line.  The three recessions preceding the current had ended in the time frame included in the graph and is denoted with two black vertical lines. 

The only obvious conclusion is that the labor-force participation rate has fallen more during the current recession than the previous three.  Three of the four recessions experienced a decline in the labor-force participation rate.  The 1981-82 recession did not suggesting that other factors may have a larger impact on the rate than the strength of the economy.  The age of the labor-force is also an important factor and, as CalculatedRisk noted, was declining prior to the recession.  Although I do not believe that it is likely, perhaps the recession has hastened retirement.   

My next post on the topic will graph the relationship between the labor-force participation and unemployment rates. 

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