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It’s hard to know for sure. The “labor force participation rate” — the share of adults who are either working or actively looking for work — is near a three-decade low, which might seem to suggest that there are lots of people waiting to return to the job market. ] But a big part of that decline is due to the retirement of the baby boom generation. And even controlling for the aging population, labor participation was falling long before the recession, for reasons that are only partly understood.

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What Is The Real Unemployment Rate?

By Ben Casselman
http://fivethirtyeight.com/features/what-is-t...ment-rate/

This is In Real Terms, a column analyzing the week in economic news. We’re still experimenting with the format, so tell us what you think. Email me or drop a note in the comments. And thank you for all the great feedback so far!

A couple of weeks back, I had a bit of fun with Donald Trump’s claim that the “real” unemployment rate is as high as 42 percent. That number is absurd — it would require counting everyone who isn’t working, including retirees, students and the disabled, as “unemployed.”

But whether or not he realized it, Trump was touching on a serious debate in economics right now: Is the unemployment rate, now at 4.9 percent, an accurate reflection of the health of the economy?

A new report from the White House this week argued that it is, or at least close to it. In the annual Economic Report of the President, released Monday, President Obama’s top economic advisers said that the people who gave up looking for work during the recession have by now largely returned to the labor force.

And while Trump and his supporters may not give much credence to a White House report, my own dive into the numbers finds that the true unemployment rate has fallen significantly over the past two years and is now under 6 percent.

A quick refresher on how the unemployment rate works:

The government only counts people as “unemployed” if they are actively looking for work. Everyone else who isn’t working is considered out of the labor force entirely. Ordinarily, that makes sense: People who are retired or who choose to stay home to raise a family aren’t unemployed; they’re just choosing not to work.

But the recession messed with the formula: The economy was so bad for so long that millions of jobless workers simply gave up looking for a job, meaning they no longer counted as unemployed.

The unemployment rate topped out at 10 percent during the recession, but it would have been higher — possibly a lot higher — if those so-called “discouraged workers” had been included.

The economy has improved a lot over the past six years, though, and economists don’t agree about how many people are still stuck on the sidelines of the labor force. Officially, there are about 600,000 discouraged workers (roughly 300,000 more than when the recession began), but the government’s definition is pretty narrow.

It doesn’t count people who don’t consider themselves discouraged but who might come back to the labor force if there were opportunities available. Imagine a stay-at-home parent who would like a job, but only if it paid enough to cover child care, or a 60-year-old who calls himself “retired” but would really rather be working.
How many of those people are there?

It’s hard to know for sure. The “labor force participation rate” — the share of adults who are either working or actively looking for work — is near a three-decade low, which might seem to suggest that there are lots of people waiting to return to the job market. But a big part of that decline is due to the retirement of the baby boom generation. And even controlling for the aging population, labor participation was falling long before the recession, for reasons that are only partly understood.

The White House, in its report, estimates that the combination of demographics (“aging trends” in the chart below)
http://fivethirtyeight.com/features/what-is-t...ment-rate/

and other long-term trends (“residual”) together account for the vast majority of the decline in labor force participation since 2009. Only the small sliver in the middle of the chart is due to the state of the economy. In the Obama administration’s estimation, there are about half a million Americans who should be in the labor force but aren’t. If they were counted as unemployed, the jobless rate would be about 5.2 percent, only a few ticks higher than the official rate.

The White House, of course, has an incentive to make the economy look as good as possible. So as a check on their number, I built my own simple model (an updated version of the one I used in this story a few years ago) to estimate how many people are still missing from the official unemployment rate. (I’ll put the details in a footnote,1 but essentially I just assumed that prerecession trends held steady.) My model estimates there are as many as 1.5 million people who should be included in the unemployment rate. That’s triple the White House’s estimate, but it still implies the “real” unemployment rate is down to 5.8 percent.

The difference between 4.9 percent and 5.8 percent is small but significant. Many economists consider 5 percent to be a rough long-term floor for the unemployment rate (other economists think the floor is lower); unemployment can’t drop much below that threshold without triggering inflation.

But if there are really hundreds of thousands or even millions of willing workers just waiting to get back into the labor market, that means there is room for job growth to continue without driving up inflation. The participation rate has edged up in recent months, suggesting that the stronger economy is drawing workers off the sidelines. Next week’s jobs report will give the latest sign of whether that trend is continuing.

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