Counting The Workers The BLS Doesn’t Count—–The 2014 Unemployment Rate Was Actually 11.4%

By Diana Furchtgott-Roth  at Manhattan Institute

The March jobs numbers were disappointing not only for the lower level of job creation, but for the continued decline in the labor force participation rate, the share of Americans who are working or looking for work. The participation rate is now at 62.7 percent, equivalent to February 1978 levels.

The creation of 126,000 jobs in March was about half of what was predicted.  This number will get revised because it is part of the Labor Department’s survey of establishments, which is not yet complete.  The March job creation figure might even get revised back up to 200,000 by the time all the corrections, including annual benchmark revisions, are completed.

In contrast, the steady decline in the labor force participation rate will not get revised, although it may eventually reverse itself with changes in economic opportunities and incentives. The data are derived from a one-time survey of households that is only updated when population estimates are revised.  Over the past few years, the trend has been only in one direction—down—despite steady but slow economic growth over the past few years.

As the graph shows, the labor force participation rate has declined for the past two months and is half a percentage point lower than a year ago. In its April 3 release, the Bureau of Labor Statistics stated, “The civilian labor force participation rate was little changed at 62.7 percent in March.”  In its March release, BLS wrote, “The civilian labor force participation rate, at 62.8 percent, changed little in February.”  But little changes all in the same direction add up.

Last year’s average labor force participation rate was 62.9 percent. If instead the rate were 66.2 percent, equal to the 2006 average, 8.2 million more Americans would have been in the labor force. The unemployment rate today, 5.5 percent, looks healthy because so many people have dropped out.  If America had 2006 labor force participation rates with the same number of people employed, last year’s average unemployment rate would have been 11.4 percent instead of 6.2 percent.

The common story for the shrinkage in the labor force is that baby boomers are retiring. But the labor force participation rate for workers over 65 years old was 18.6 percent last year, almost 2 percentage points higher than the level of 15.4 percent in 2006.

The biggest concern is the share of men ages 25 to 54 years old who no longer are in the labor force.  These men have generally finished school and have not yet retired. In 2006, 91 percent of prime-age men, as they are known, were in the labor force. In 2014 the share was 88 percent. Controlling for demographic shifts, three million fewer men are in the labor force now compared with seven years ago.

Women have always had a lower labor force participation rate than men because some prefer to stay home to look after children.  Historically, about 25 percent of women work part time. The share of women ages 25 to 54 years working or looking for work has declined to 74 percent last year from 76 percent in 2006. That adds up to 2.6 million fewer women in the labor force.

The share of young people working has also declined. The labor force participation rate for workers ages 20 to 24 years old was 75 percent in 2006 compared with 71 percent last year.  That is 800,000 fewer young workers.

Similarly, the labor force participation rate for workers ages 16 to 19 years old was 34 percent last year, compared to 44 percent in 2006. Controlling for demographic shifts, that adds up to 400,000 fewer teens.

These young people are not in school training for better careers.  According to Census Department data, the percentage of 16- to 24-year-olds enrolled in high school, college, or university has barely changed over the past decade, rising from 56 percent to 57 percent.

With broader eligibility for government-provided food stamps, health care, and disability benefits, it has become more advantageous for some people to stay home than to work. At the same time, increases in the minimum wage and burdensome regulations have made it harder for employers to hire. The combination has led to fewer Americans working, slower GDP growth, and more pressure on the federal deficit and entitlement programs.

The solution is to move the provision of welfare benefits back to the states, who can better evaluate which residents need help. Whenever possible, regulations should be left to the states so that these rules can be better streamlined and adapted to geographic and demographic circumstances.

Pundits can bemoan the low level of jobs created last month. But the greater problem is Americans who have left the labor force during the recession and show no signs of returning.

More Americans Give Up Looking for Work | Economics21.