Unemployment Drops as Labor Force Participation Drops- Unusual

Irvine Child Support LawyerAMERICA has experienced a puzzling decline in the share of people either working or looking for work. Historically the “labour-force participation rate” fell during recessions as some of the unemployed gave up looking for work, and rose amid recoveries as discouraged workers returned, according to an interesting article in the The Economist

Since the height of the Great Recession in 2009, America’s unemployment rate has fallen from 10% to 6.1%.
During this period, the labour-force participation rate—the share of the population 16 and over that is either working or looking for work—has fallen to 62.8 percent, a 36-year low.
This combination is unusual. In past recoveries, declining unemployment has led to rising, not falling, labour force participation.

Not this time. The recovery is now five years old, yet the participation rate continues to drop, currently 62.8% from 66% in 2007. Cyclical factors may be at play: the slow recovery has driven an inordinate number of people out of the work force (or into part-time work); they may return as the economy improves. Yet the aging population means a growing portion of people have retired, and are not coming back.

The relative contribution of these two factors is crucial to the Federal Reserve. If cyclical factors are significant, then the unemployment rate understates slack in the labour market and the Fed can take its time about raising interest rates. If structural factors predominate, then the unemployment rate, at 6.1%, is a fair reading of slack and the Fed may need to move soon.

On September 17th Janet Yellen, the Fed chairman, suggested that she held the former view. “There is,” she said, “a meaningful cyclical shortfall.” But that may not last if both unemployment and participation continue to slip.

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