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The Incredible Shrinking Labor Force

Some factors about the Civilian Labor Force are quite astounding and not getting much attention.  An article at tries to remedy this lack of attention here.

A couple of the factors highlighted:

1.  Dept. of Labor monthly data shows that the labor force has contracted in three different months of 2009.  There hasn't been a single other month of contraction in nearly 50 years.

2.  In 2009, the labor force is growing (twelve-month moving average) at half the rate of population growth.

In previous articles, I have pointed out that the only thing keeping the official unemployment rate below 10% is the 2009 decline in the labor force.  The official unemployment rate (U-3) is calculated by dividing the number reported as unemployed by the number in the labor force.  As people who have previously been counted among the unemployed become discouraged (you are only counted as unemployed if you are actively looking for work) they drop from both lists, the unemployed and the civilian labor force.

An example will help.  (Note, this is hypothetical to make my point obvious upon inspection.) Let's say, in May, there are 100 unemployed in a labor force of 1,000. In June, 10 more people become unemployed and 20 become discouraged and temporarily stop seeking work. The June number of unemployed becomes 90 and the labor force is 980.  In May the unemployment rate was 10% (100/1000), but in June the unemployment rate is 9.18% (90/980).

It is an artifact of the construction of the data reporting system that the unemployment rate went down.  In fact, the unemployment rate could be even higher in June than it was in May without the artificial constraint of the DOL rules that, to be counted, a person without work must have actively sought a job in the preceding four weeks.  In the above example, the unemployment rate could be calculated as 11% (110/1000) if the 20 newly discouraged workers are continued to be counted as unemployed and part of the labor force.

The history of  labor force growth, the long-term trends and the behavior of labor force growth during the business cycle are all examined in article.  Some implications for investing in various sectors of the stock market are also discussed.  The link again is