U.S. Economy

When a Falling Jobless Rate Is Bad News


When a Falling Jobless Rate Is Bad News

Photograph by Ashley Gilbertson/VII Network

When is good news bad news? When we’re talking jobs. In the upside-down logic of the labor market, a falling unemployment rate can sometimes be a worrisome sign if it indicates that people have permanently given up looking for work. If you’ve quit looking for work, you’re no longer considered part of the labor force. And if you’re not in the labor force, you’re technically not unemployed. So the jobless rate, now at 8.3 percent, falls for the worst of reasons.

Many economists have been arguing that as the U.S. economy recovers, a flood of people who had left the labor force will become encouraged to start seeking work again, so the unemployment rate will start rising, even as the economy adds jobs at a good clip. But a new report by economists at Barclays Capital argues that that will not happen—most people who left the labor force aren’t coming back. The notion that they are, says Barclays (BCS), “is something of an urban legend.”

The Barclays conclusion may be good news for people who are hunting jobs—less competition! But it’s bad news for society as a whole, because it means that a smaller corps of workers will be supporting a bigger army of non-workers, including retirees, the disabled, children, prisoners, and so forth.

The report by Barclays economists Dean Maki, Troy Davig, and Peter Newland isn’t all discouraging. It does say that people who continued looking for work will be more likely to find it as the economy gains speed. It makes these points:

  • The retirement of baby boomers has played a bigger role than the cyclical downturn in lowering labor force participation.
  • History shows that re-entrants into the labor force “have played, at best, a tangential role in unemployment rate dynamics.” And there’s no reason to expect that this time will be different.
  • The retirement of baby boomers has played a bigger role than the cyclical downturn in lowering labor force participation.
  • Only a third of the drop in labor force participation is accounted for by those who say they want a job. Only 15 percent of the drop is accounted for by those who say they want a job and are also of prime working age—25 to 54.
  • History shows that re-entrants into the labor force “have played, at best, a tangential role in unemployment rate dynamics.” There’s no reason to expect that this time will be different.

The Barclays bottom line: ”We expect the unemployment rate to continue falling.” In fact, they expect it to fall to about 7 percent by the end of 2013. But the employment-to-population ratio will still be about 4 percentage points below its pre-recession peak, the economists say.

Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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Companies Mentioned

  • BCS
    (Barclays PLC)
    • $15.18 USD
    • -0.33
    • -2.17%
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