President Obama is hyping the drop of the unemployment rate down to 8.1%. This is important since no incumbent president since FDR has managed to get re-elected with an unemployment rate above 8% and he seems on track to squeeze under that dread number. The economy is recovering, right? No.
The unemployment rate is determined by dividing the number of people unemployed (U) by the number of people in the job market, called the Labor Force (LF). Currently, we have 12.5 million unemployed out of a Labor Force of 154 million people, which works out to 8.1%. Cut and dry, right? Yes, but that's not the whole story.
The Labor Force is only a portion of the population who fall between the ages of 15 and 64. In 2008, 66% of the people in that range were in the Labor Force; this is called the Participation Rate. Today, only 63.6% are in the labor force. Though that may seem a small change, it adds up to millions of people. Those not in the labor force has grown from 79.5 million in 2008 to 88.4 million today.
If the participation rate were still at 66%, the unemployment rate would be over 11%. A shrinking participation rate has lowered the unemployment rate. When the economy really starts to recover, the unemployment rate will go up as the chronically unemployed returned to the labor force. The current drop just means more people are throwing up their hands and dropping out of the labor force.
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