The official, U-3 unemployment rate is 8.6 percent. But while the unemployment rate has been dropping, so has the labor force participation rate, as measured by the U.S. Department of Labor. Instead of being classified as unemployed, more and more Americans are no longer considered part of the official labor force that is either a) working or b) looking for work. This lowers the unemployment rate. But what if Washington hadn’t disguised all those discouraged workers since the recession started? Well, take a look at the yellow line below (via JPMorgan). The unemployment rate would be over 11 percent:
Some economists point out that there is a secular reason for the drop: America is aging and more of us are heading into retirement. But JPMorgan economist James Glassman says demographics are hardly the whole story:
How significant is the demographic drag on the labor force participation rate, labor force growth, and the unemployment rate? A useful guess about this is to ask, What would happen to the overall labor force participation rate if the participation rate for each age group (cohort) stayed at the late-2007 (prerecession) level. That would ignore the effect the recession had on each group, the increase in the number of dropouts.
In that calculation, any change in the overall labor force participation rate would reflect only the rising number of workers turning 55 or more who naturally, according to the illustration [below], begin to scale back their hours or retire
The number is calculated by looking at how many people are employed. The top line marks out where the labor force participation rate stood in 2007. The bottom line illustrates the actual labor force participation rate, which has fallen from 66.4 percent in 2007 to 64 percent currently. The second from the bottom line in the illustration shows what the labor force participation rate would have done if the participation rate for each age group had held steady over the recession as the population aged. It indicates that the labor force participation rate would have fallen to 65.1 percent, accounting for only half of the decline in the actual labor force participation rate. This calculation is a maximum estimate of the demographic impact on the labor force participation rate.