Unemployment Rate Drop Due to Workers Leaving Labor Force
The November employment report appeared to be good news. The unemployment rate fell to 7.7 percent, the lowest level since 2009, and the economy created 146,000 jobs. However, a closer reading of the details shows that the labor market is not recovering any faster but instead continuing its long, painful march to full recovery.
The only reason that the unemployment rate fell was because more people dropped out of the labor market than actually found jobs. The labor force declined by 350,000 and the labor force participation rate, a measure of potential workers, declined to 63.6, the same level as reported in September. The recovery is well underway, yet potential workers continue to remain on the sidelines and out of the labor market. One reason is that approximately 1.5 million more potential workers are on the disability rolls now as compared to 2007. It is doubtful that many of them will ever return to the labor force, lowering future economic growth.
The 146,000 new jobs being created are positive, but the good news is tempered by downward revisions to previous months of 45,000. The economy needs to produce 125,000 new jobs to keep up with population growth. 146,000 jobs are not enough to reduce the unemployment rate unless people leave the labor force. The Federal Reserve Bank of Atlanta’s job calculator estimates it would take five years to reach full employment given the current rate of job creation. This is unacceptable.
Unfortunately, this report may be as good as it gets. Businesses, both large and small, are delaying expansion and hiring activities due to the concern of higher taxes and the fiscal cliff. The labor market recovery will continue to be slow as bad public policy in Washington, such as these higher taxes, continue.