MacroScope

If not for shrinking labor force, U.S. unemployment would be over 11 percent: UniCredit

March 8, 2013

The U.S. workforce has been shrinking rapidly in recent years, but a new report from UniCredit highlights just how massive the effect of this trend really is. Economist Harm Bandholz says it amounts to a gaping 3.6 percentage points of U.S. unemployment.

That means the U.S. jobless rate, which dropped to 7.7 percent in February, would actually be around 11.3 percent without the decline in labor force participation. This would put American unemployment a lot closer to the euro zone’s recently reported record high rate of 11.9 percent.

The labor force participation fell further in February to 63.5, matching an August reading that was the lowest since 1981.

Of that 3.6 percentage point decline attributable to a shrinking workforce, a little over half is due to long-term demographic factors, Bandholz’s models surmise. But the remainder represents direct damage to the U.S. job market from the Great Recession. While labor force participation has historically moved lower during economic slumps, Bandholz says the recent drop has been particularly abrupt.

“What is unprecedented since World War II, however, is the extent of the current cyclical decline,” he writes.

That makes the task of pushing for a fuller recovery in employment all the more pressing for the economy’s long-term health.

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