For the third month in a row, the U.S. unemployment rate has been lower than economists were expecting. That’s mostly good news, but the reason they have been wrong could be worrying for the long-term unemployed.
The unemployment rate is calculated by dividing the number of people who are unemployed by the total number of people working or looking for work. The best way for the rate to fall is for the number of unemployed to drop because more people found a job. But it can also decline when people give up looking for work altogether.
For the most part, it looks like the unemployment rate in June fell for the right reasons. There were 325,000 fewer people unemployed and 407,000 more people were working last month than in May. But that number masks the much larger moves of people through the labor force. Yes, a total of 325,000 fewer people were unemployed, but every month millions of people flow into and out of unemployment for all sorts of reasons. That number is just the net result of all those moves.
Some 2.15 million people moved from unemployment to employment last month, but an even larger number of unemployed — 2.35 million — dropped out of the labor force. In all but two months since December 2008, more unemployed have dropped out than found jobs. That has brought the share of people working or looking for work — known as the labor force participation rate — to 62.8%, matching a 30-year low.
And that’s at the heart of why economists have been wrong about the unemployment rate lately. They keep expecting people who have become discouraged during the recession and slow recovery to start looking for work again. When someone starts looking for work after having given up, they are counted as unemployed, and that can lead the unemployment rate to increase. But that hasn’t happened. In fact, the number of unemployed who were re-entering the labor market actually fell in June.
To be sure, it’s unclear how much of a problem a low labor force participation rate is. Not all of it is due to the unemployed giving up. There are demographics factors, such as more young people enrolled in college and a retiring Baby Boom generation, playing a role. It also is possible that people who previously gave up looking for work and dropped out are moving right into employment without a spell of searching that would make them count as unemployed.
But there is evidence that the job market isn’t improving for the long-term unemployed. And if people who have been unemployed for long stretches have completely given up and aren’t seeing their prospects improve, the problem will get increasingly difficult to solve.