The labor force participation rate (the share of working-age people who either have a job or are jobless but actively seeking work) has dropped by more than two percentage points since the start of the Great Recession in Dec. 2007. According to a recent EPI analysis, roughly two-thirds of this decline is due to weak job prospects in the recession and its aftermath (these changes are generally labeled cyclical), while the remaining one-third is a result of long-term trends such as baby boomers beginning to retire (changes generally labeled structural). The cyclical portion of the decline in the labor force participation rate represents nearly four million workers who would be in the labor market if job prospects were strong. The existence of this large pool of “missing workers”—workers who have either dropped out of or never entered the labor market because of the lack of job opportunities—means that the unemployment rate is understating weakness in the labor market.
Arguably the best single measure for assessing recent labor market trends is the employment-to-population ratio of 25-54-year-olds, which is simply the share of the 25-54 population that has a job. The restricted age range—25-54-year-olds, or people of “prime working age”—helps insure that trends are not being driven by retiring baby-boomers or increasing college enrollment of young people, but are instead caused purely by changes in job opportunities.
As the figure shows, the share of employed workers 25-54 plunged dramatically from the start of the Great Recession through the fourth quarter of 2009, and then, for nearly two years, essentially bumped around at the bottom of that extremely deep hole. Since the fall of last year, the ratio has just begun to show signs of improvement.
This means that the improvement in the unemployment rate, from 10.0 percent in Oct. 2009 to 8.1 percent in April 2012, has largely been due to people dropping out of, or not entering, the labor force—not to a larger share of potential workers finding work. This also means that while expansionary policies to generate demand are urgently needed and will help spur job growth, they may also generate upward pressure on the unemployment rate as these missing workers begin to enter or reenter the labor market. That kind of upward pressure on the unemployment rate would be a positive sign.