The Unemployment Rate Puzzle

This morning’s release of December’s unemployment data by the BLS contains the same puzzle that’s been dogging this economy for months. Why has the unemployment rate continued to fall over the past 6 months, even though jobs have not been created?

The answer is that people are dropping out of the labor force. The BLS conducts a survey every month and asks about 60,000 households whether they are working, and if not, whether they are actively looking for work. The number of people who have responded that they are not working but are actually looking for work (and thus are technically unemployed) has fallen from about 9.2 million in June to 8.4 million in December. That’s good. Unfortunately, they apparently haven’t stopped working because they’ve found jobs, since the number of jobs in the US economy is still below where it was a year ago. (See the graph in this post to see what I’m talking about.) They’ve stopped working for some other reason.

This makes me curious. Who is it that’s dropping out of the labor force and giving up on the search for work? And why are they no longer looking for work? The following graphs give some interesting information about this, though they don’t provide the answer.

The first one shows the “labor force participation rate” (LFPR), which counts the percentage of the total population that is either employed or actively looking for work. As you can see from the brown line, it has fallen quite a bit over the past couple of years, and shows no sign of picking up yet. The blue line shows the LFPR for women only. It rose a lot during the 1990s, and interestingly, hasn’t fallen. That gives us one piece of information about who’s leaving the labor force: they’re men, not women.

The second graph breaks the labor force into education categories. The brown line shows the LFPR for all people who are over 25 years old but never completed high school. The blue line shows people over 25 who have a college degree. The results really surprise me, but there they are: more poorly educated people are working, while more college educated people are dropping out of the labor force.

What’s the explanation? I honestly don’t know. Maybe this reflects a boom in low-skill jobs and a dearth of high-skill jobs in the US economy? Or maybe it’s a reflection of the growing income inequality in the US — well-educated (and thus wealthier) families have gotten so rich that can afford to have one member of the family stay home, while families who earn relatively little are being forced to work more to maintain their income. Or maybe it reflects a shift in preferences — perhaps some well-educated people are deciding that their families are more important than finding a new job?

If anyone has another good theory to explain these facts, I’d love to hear it.