We mentioned Labor Force Participation Rate over the weekend. It is worth exploring a bit further.
One of the lesser noted aspects of the NFP report Friday was the drop in the Labor Participation Rates. It is the percentage of the total population that is either working or potentially working. In the U.S., it is about 170 million people, and excludes children, retirees, non-employed (work at home moms, etc.). That Labor Pool measure peaked in 2000 at just under 67.4%. Following the market crash and recession, it subsequently fell about 1.5% to about 65.8%. This accounted in no small part for the falling Unemployment rate from 2001 - 05.
Now, a 1.5% or so drop doesn't sound like a lot, but remember there are 143 million workers in the U.S. That drop equals about 3 million people. These are folks who are willing to take a full time job, have been unable to find work, and have exhausted their unemployment benefits.
The Labor pool drop appeared to have bottomed and reversed itself late 2005 (see chart above). The 5 year downtrend channel was broken, and a new uptrend -- higher highs and higher lows -- was beginning.
It has since started heading lower again. They do not count in the "official" Unemployment Rate statistics. However, BLS actually does measure these folks in their "augmented unemployment rate" -- the jobless people who aren't counted among the officially unemployed. That measure is 7.4%.
There is a good definition of this here. The longer term chart below parallels the unemployment rate -- but from higher levels.
Some people have asked if this 7.4% level is a good or a bad thing. That qualitative description is less relevant to me than the quantitative conclusion that the 4.5% Unemployment Rate is very misleading.
David Altig at Macroblog thinks it is mostly due to secular changes, and I do not disagree. But for policy makers -- such as the Federal Reserve -- the belief that the labor market is very tight with no slack is clearly belied by the data.
The significance: It may have an impact as to whether they have the room to cut rates or not.