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Friday, December 2, 2011

Reducing Unemployment by Shrinking the American Workforce

On Friday, Dec. 2, the government surprised Wall Street and most Americans by reporting that the U.S. unemployment rate fell to 8.6% in November on a seasonally adjusted basis, from 9.0% in October. Unfortunately, this is more a sign of how bad the job market is right now than an indication that job conditions are improving.

On Thursday, Gallup reported that its not-seasonally adjusted unemployment measure was 8.5% for November -- not much different from Gallup's 8.4% and the government's 8.5% not-adjusted rates of October. However, the government's not-adjusted measure fell to 8.2% in November.

Normally, this sharp drop in unemployment -- whether measured before or after seasonal adjustment -- would be very good news, a sign that the U.S. economy is improving at a faster pace than generally recognized. Instead, a careful look at the government's data shows something else -- the decline in the unemployment rate was largely due to a sharp decline in the size of the U.S. workforce.

On an unadjusted basis, the size of the workforce fell by 405,000 Americans in November. As a result, the U.S. workforce of November 2011 is the same size as it was in November 2010. If the number of employees dropping out of the workforce last month were still looking for work, the unadjusted unemployment rate for the month would have been 8.5% -- the same as Gallup had measured in November and as the government did in October. Presumably, this would have resulted in essentially no change in the seasonally adjusted unemployment rate for November.

Of course, some people are always leaving the workforce as they retire, lose their job, or just get discouraged. However, the large number of Americans dropping out of the workforce last month likely also reflects the severely depressed job market conditions of the past three years.

Most importantly, reducing the unemployment rate by driving potential employees out of the workforce is not a solution to today's job problem or a good sign for the U.S. economy. Instead, Friday's unemployment report is another sign of how bad job-market conditions have been for far too long.


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