MacroScope

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.

The U.S. jobless rate, currently at 7.7 percent, remains elevated by historical standards. But it has fallen sharply from a peak of 10 percent in October 2009. However, that decline could soon grind to a halt, according to a recent paper from the San Francisco Federal Reserve.

Its authors argue that, because the slow but steady decline in the jobless rate has been in part due to slippage in the labor participation rate that is more a product of the business cycle than long-run demographic trends, as the Bureau of Labor Statistics presumes.

In January, the U.S. Bureau of Labor Statistics significantly reduced its projections for medium-term labor force participation. The revision implies that recent participation declines have largely been due to long-term trends rather than business-cycle effects. However, as the economy recovers, some discouraged workers may return to the labor force, boosting participation beyond the Bureau’s forecast. Given current job creation rates, if workers who want a job but are not actively looking join the labor force, the unemployment rate could stop falling in the short term.

The September unemployment rate was the lowest since December 2008 after surprisingly large back-to-back declines, sending economists back to the drawing board after big forecast misses. Some pointed to the large increase in involuntary part-time employment – erroneously so, according to an analysis from Ray Stone, economist and managing director at Stone & McCarthy.

The jobless rate fell to 7.8 percent last month from 8.1 percent in August.

After a quick, superficial look at the September household data, several commentators embraced the thesis that it was due to a 582,000 increase in Part-Time Employment for Economic Reasons. These are people who prefer full-time employment, but sadly had to settle for a part-time job. These 582,000 part-timers accounted for much of the overall 873,000 increase in September civilian employment.

This Part-Time for Economic Reasons statistic “was a Greenspan favorite, and certainly over longer periods of time such is a measure of labor distress,” Stone said. “But, the month-to-month wiggles in this series usually turn out to be noise. In September this metric rose to 8.613 million.”