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Dropping out of search may skew U.S. jobs data

U.S. policy makers are worried that the country's unemployment rate may be getting an artificial slant from the number of people who have given up in their search for jobs.

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As U.S. policy makers fret about their high jobless rate, attention is increasingly turning to another troubling aspect of the labour market: A growing number of people are dropping out.

The Labour Department is expected to report on Friday that the jobless rate held steady at 8.5 per cent in January, according to the median view of Wall Street analysts, down from 9.4 per cent in December, 2010.

That's one of the fastest drops in the unemployment rate on record, yet the jobless numbers are generating little enthusiasm among analysts. The jobless rate may be falling, but so is the participation rate, which measures those working and looking for work but excludes those who have given up.

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Some 1.6 million Americans found jobs in 2011. That was just enough to keep ahead of the 90,000 people that join the U.S. work force every month from factors such immigration and graduation. The reason the unemployment rate dropped so dramatically is that 170,000 people left the labour force over the final two months of the year, dropping the participation rate to 64 per cent from 64.3 per cent a year earlier.

The "outright decline in the labour force" means the "decline in the unemployment rate may overstate the improvement in labour market conditions," New York Federal Reserve president William Dudley said Friday in New York, according to a report by Bloomberg News.

There is no single explanation for the drop in the participation rate. The sudden dip at the end of the year could reflect the unusually slow economic recovery. Extended jobless benefits are also beginning to expire, a point at which economists say one of two things happens: People settle for lesser jobs, or they give up looking altogether.

Finding a job when the unemployment rate is above 8 per cent is difficult. There currently are about four unemployed workers for every job opening, compared with 1.5 for each unfilled position before the recession. The longer people languish on unemployment rolls, the harder it is to find a job as skills atrophy.

Fewer young people are looking for work, which could signal a renewed emphasis on education over fruitless job seeking. This shift could result in a pool of skilled workers in the future, but for now, they represent lost economic output.

A declining unemployment rate coupled with a growing pool of workers is a sign of strength; a lower jobless rate that's merely a function of a contracting population of potential workers is the opposite.

"Growth in the labour force is a primary determinant of the potential growth rate of the U.S. economy," James Marple, a senior economist at Toronto-Dominion Bank in Toronto, said in a report published last week. "A declining labour force represents nothing short of a loss of economic potential."

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If there is strength in the U.S. economy, the work force should grow as discouraged workers resume their job searches. This likely would cause the unemployment rate to rise for a period of time.

"Recent encouraging news on the U.S. labour market should have continued into the start of 2012, although further improvement may well prove harder to achieve," said Andrew Grantham of CIBC World Markets. "With growth settling to a more moderate pace, hiring would do well to average much in excess of 150,000 [a month]this year. This would not be enough to prevent the unemployment rate from edging up later in the year should previously discouraged workers return to the labour force."

In Canada, the participation rate stood at 66.6 per cent in December, compared to 66.9 per cent a year earlier, and the jobless rate was 7.5 per cent.

Economists expect Statistics Canada to report Friday that the economy created more than 20,000 jobs in January, with the unemployment rate little changed.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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