Sometimes, the unemployment rate leads you astray.
The Friday jobs report looks decent—payrolls increased by 169,000 in August, while the unemployment rate dropped by a tenth of a percentage point to 7.3 percent. This fits the general narrative of economists who expect the Federal Reserve to pull back on its monthly adrenaline shot of $85 billion in bond purchases.
Except that the underlying data should raise severe concerns about the economy.
The unemployment rate dropped in large because Americans are fleeing the workforce. The labor participation rate—how many people are employed or seeking work—fell to 63.2 percent, the lowest level since August, 1978. That was 35-years ago, a time when women were still moving in large numbers from the kitchen to the office, joining the ranks of the employed in ways that boosted economic growth.
University of Michigan economist Justin Wolfers described the report on Twitter with three words: “Bleh. Ugh. Ouch.”
Here is another way of explaining why labor force participation matters so much. The Bureau of Labor Statistics does not calculate the unemployment rate based on people who dropped out of the workforce. Its household survey estimates that 312,000 exited the labor market last month, dwarfing the job gains in a way that means that few Americans have jobs than they did last month.
On top of that, revisions in the report estimated that 74,000 fewer jobs were added in June and July than were announced earlier. Auto manufacturing did climb by 19,000 jobs. But the biggest gainer was 44,000 jobs in the retail sector—where full-time wages average a relatively modest $27,071.
Adam Hersh, an economist at the progressive Center for American Progress, noted that 84 percent of the jobs created since the Great Depression have been in fields that pay below-average wages.
So, how disturbed should Americans be by the declining labor force participation?
Very. Because we don’t know why people are leaving. Is it due to discouraged workers who are sick of low wages and getting rejected job applications? Or, is it mostly because the Baby Boomer generation is retiring, causing the labor force participation rate to decline? In one scenario, the skills of workers atrophy as they become more reliant on government aid or the underground economy to make ends meet. In the other scenario, a graying population consumes more Medicare and Social Security—as the number of workers paying for the government entitlements drop.
Part of the problem is that the Fed and other policymakers are trying to reach conclusions about the economy without having a clear answer to this problem.
“It’s devilishly hard to distinguish between people who have left the labor force because of ongoing trends and those who left because the job market has been hurting,” said John Williams, president of the San Francisco Fed in a speech this week. “There’s just a huge amount of uncertainty about what causes people to enter and exit the labor force for us to have much confidence in the employment-to-population ratio as a gauge of how close we are to maximum employment.”
