Some background: the unemployment rate is only one of several numbers economists use to assess the jobs picture. When the economy is generating an abundance of jobs, economists expect to see strong growth in the payrolls reported by employers and in the number of people who say they have jobs, together with a rise in the length of the average workweek. They also expect to see wage gains well in excess of inflation, as employers compete to attract workers.In fact, we see none of these things. As Berkeley’s J. Bradford DeLong writes on his influential economics blog, “We have four of five indicators telling us that the state of the job market is not that good and only one – the unemployment rate – reading green.”In particular, even the most favorable measures show that employment growth has lagged well behind population growth over the past four years. Yet the measured unemployment rate isn’t much higher than it was in early 2001. How is that possible?The answer, according to the survey used to estimate the unemployment rate, is a decline in labor force participation. Nonworking Americans aren’t considered unemployed unless they are actively looking for work, and hence counted as part of the labor force. And a large number of people have, for some reason, dropped out of the official labor force.Those with a downbeat view of the jobs picture argue that the low reported unemployment rate is a statistical illusion, that there are millions of Americans who would be looking for jobs if more jobs were available. Those with an upbeat view argue that labor force participation has fallen for reasons that have nothing to do with job availability – for example, young adults, recognizing the importance of education, may have chosen to stay in school longer.That’s where Dr. Bradbury’s study comes in. She shows that the upbeat view doesn’t hold up in the face of a careful examination of the numbers.
Bill Polley has additional insights.
Update: Jude Wanniski claims to have solved the Dropout Puzzle (hat tip to AB reader JP). If Mr. Wanniski wrote this piece a little more sensibly, I might argue that it was a nice discussion of real business cycle theory. But he is too eager to declare lower employment to be clearly a good thing and his claim that he predicted a decline in the employment to population ratio strikes me as absurd. Why? Doesn’t Mr. Wanniski keep telling us that reductions in tax rates increase employment and output?
Of course, Mr. Wanniski at least offers one theoretical explanation for his claim – an assertion that increases in investment will lead to a higher capital to labor ratio and higher real wages. But there are two problems with his new theory: (1) it contradicts his usual notion that substitution effects dominate income effects; and more importantly (2) real wages have been falling – perhaps because investment demand is still weak.