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June 2012
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REVERSAL Workforce participation increase a needed change

When the Labor Department's unemployment report came out last week, the jobless rate unexpectedly ticked up a tenth of a percent. Would you believe that's good news? It is actually, if one analyzes the underlying reason.

The jobs report showed the economy added 209,000 jobs in July, modest growth by most measures, but progress nonetheless. The reason the unemployment rate ticked up is because, for the first time in awhile, more people joined the labor force than left it.

As an article in the Wall Street Journal points out, the reason the official unemployment rate has fallen swiftly in recent months is that people have been dropping out of the labor force, including people whose unemployment benefits ran out who just gave up looking for work. There also has been a lack of people joining the workforce. The WSJ article says over the past year the labor force has grown by an average of 28,000 people a month versus the 120,000 a month that would be implied by population growth.

But the trend reversed - modestly - in July, when the share of working age population in the workforce rose from 62.8 percent to 62.9 percent. That remains below the 63.4 percent participation rate of July 2013, but at least it is a step in the right direction.

That's good for a couple of reasons. One is that it dampens concerns that the labor market could become tight despite the modest rate of jobs growth, causing wage inflation and forcing the Federal Reserve to raise interest rates sooner than planned. Higher interest rates would of course slow the economy.

A second reason is the impact people neither working nor seeking work have on the public assistance rolls. The U.S. Census Bureau reported in 2011 that 49.2 percent of Americans were receiving some form of government assistance and Forbes magazine projected earlier this year that the number has grown to 52 percent with the addition of Obamacare health insurance subsides. A 2012 Pew Research Center study found that 55 percent of Americans have received government assistance at some point in their lives.

Simple logic dictates that if more than half of the nation's population is on assistance, a high rate of workforce participation is required to support it. The system is going to collapse pretty quickly if the labor participation rate remains mired at levels last seen in the 1980s.

Of course last month's jobs report is just a one-month snapshot, and cannot be counted on to be a trend. But we would all be better off if it turns out to be one, with unemployment actually ticking up a tad in the months ahead as more jobs are created and more people join the labor force to pursue them.

The Wall Street Journal projects that if the labor participation rate simply moved to the 63.4 percent where it stood a year ago and the job-creation rate remains where it was last month, unemployment will still be at 6 percent a year from now. That's not great by historical standards, but it would mean more people working and more people joining the workforce. Further, if more workforce participation means the unemployment rate comes down more slowly, it probably means interest rates rise more slowly over time, and that's a benefit to everyone as well.

Granted, it's a strange world when one can say an uptick in the unemployment rate is a good thing. But in the current environment it does constitute a glass-half-full scenario.

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