[Update below] Much of the chatter surrounding the latest BLS release has focused on a spike in the denominator of the unemployment statistic, the fraction of the population either working or actively looking for work. Courtesy of the indispensable FRED...
About a year ago, David Altig (whose macroblogging I miss very much) wrote the following:
[Since 2000] you would be justified in claiming a broad-based decline in the number of people choosing to participate in U.S. labor markets. But I use the word "choosing" intentionally, as I'm convinced that the post-2000 changes in labor force participation rates (or employment-to-population ratios, if you like) reflect trends that are largely independent of the business cycle.
Much turns on the question of why people chose not to participate in the labor force this decade. A "business cycle" explanation, as I read Altig, would mean that people left the labor force because there weren't employment opportunities. They couldn't find a job, and became "discouraged workers", in the lingo. I agree with Altig that this is unlikely. However, unemployment statistics (very uneconomically) ignore price, and stagnant real wages over the period undoubtedly had something to do with the decline in participation. People chose not to work because they decided the money wasn't worth their time.
But it's also important to consider a credit cycle explanation for why people left the workforce. One has the luxury of choice when one can afford to do without employment. During a credit expansion, many people have that luxury, because one can live off of borrowing and asset appreciation. You can quit your shitty job and withdraw some home equity while you write the great American novel, focus on your music, or raise your children. You can go to school, even though you lack savings, because student loans are plentiful.
But when credit conditions tighten and asset prices fall, work becomes less optional. Quitting the rat race and pursuing your passion starts to recall the phrase "starving artist", and not in a charming way. Dad might decide he needs a job to make ends meet, even if that means putting the kids in day care.
Some argue that the US economy is structurally immune from the wrenching spikes in unemployment that used to accompany recessions, because employment has transitioned from volatile manufacturing to more mellow services. See, for example. this excellent analysis from Calculated Risk. CR chooses 8% unemployment as his threshold for a "severe" recession. But the US economy need not lose a single job more to bring unemployment to that level. If participation rose back to the levels of the late 90s without a commensurate increase in new jobs, we'd be there already.
When we ended welfare as we know it, back in the nineties, the slogan "Choose to work" might have captured the spirit of the times. It's ironic that more than a decade later, the apparent health of the American economy depends largely on how many people continue to choose not to work, now that the credit spigot has dried up.
Update: While chatting with a commenter on the above, I went back to the Mathematica notebook where I had played with the numbers, and found an error in my arithmetic that is, as they say, "material". I erroneously used 68%, rather than 67%, as the late 90s participation rate, when I asserted that unemployment would be 8% today if participation returned to previous levels. The correct value is 6.6%.
That is, if an additional 0.8% of the "civilian noninstutional population" became active job seekers, but no net new jobs were created, the reported unemployment rate would be 6.6%. (The numbers, which hopefully I've correctly transcribed for a change, are May 2008 data from the June 6 release of BLS employment situation, Table A-1.) That's still a big jump from 5.5%, but it's a far cry from 8%, which sounds like a nasty recession.
To say I regret the error would understate the red-faced heart-thumpingness of the thing. Sorry!
