When is a declining jobless rate a bad thing?
Answer: When a big part of the drop is because people are abandoning the labour market, many without hope and too discouraged to look for work.
That, unfortunately, is what’s happening in the United States.
“A declining labour force represents nothing short of a loss of economic potential,” Toronto-Dominion Bank economist James Marple said in a report Thursday.
Over the past year, the U.S. jobless rate has dropped to 8.5 per cent from 9.4 per cent.
The decline surprised many forecasters, who badly underestimated the labour dropout rate, Mr. Marple explained.
“While the decline in labour force participation has meant a faster decline in the unemployment rate, this is not a good news story,” he argued.
In normal times, most discouraged workers would return to the labour force as the economy rebounds.
There is a silver lining. There’re evidence that many younger workers are going back to school, getting the skills they’ll need in a changing economy.
But the report also suggests “structural impairment” in several U.S. industries is keeping workers from returning. The average length of unemployment is now 39.4 months, more than twice as long as it was in the 2001 recession.
“There is a real and significant downside to a relatively moribund participation,” Mr. Marple said. “Growth in the labor force is a primary determinant of the growth rate of the economy. The structural forces that are impeding a true recovery in the labor force will be a key challenge to restoring U.S. economic growth to its full potential.”
