So the parade of bad economic news keeps on rolling. Today we had some pretty bad unemployment figures for the month of May. What makes this especially bad is that the unemployment rate is at 9.1% despite the fact that we took out approximately 4 million workers from the labor force since November 2008. Take a look at the chart below which shows the labor force participation rate since January 1981.
As you can see, the % of the population above the age of 16 that has been participating in the labor force has been at 66% or above since 1988. Since November of 2008, however, this rate has fallen to 64%, a level not seen since the early 80's when the economy was recovering from years of stagflation. Why is this important? The labor force figure provides the denominator in the unemployment rate calculation. As the next chart will show you, almost all of the decline in the "official" unemployment rate has been because of this decline in the size of the labor force participation rate. In the chart below, I plotted the "official" unemployment rate (in Red) against the unemployment rate if the labor force participation rate had held constant at 66% since November 2008 (in Blue).