In the previous post, I mentioned that although the unemployment rate was down in April, this wasn’t so much because lots of people had suddenly found work. It’s mostly because a lot of people dropped out of the labor force and were no longer counted in the statistics. Think of it this way: If 93 people out of a labor force of 100 have jobs, the unemployment rate is 7 percent. But if one of those unemployed people gives up and exits the labor force entirely, then the labor force shrinks to 99 people. Now, 93 out of 99 people have jobs. That’s an unemployment rate of 6 percent even though the exact same number of people have jobs.
The labor force participation rate measures how many people in the total population are part of the labor force (i.e., working or looking for work). That number went way down in April. This produced a smaller labor force, which is the main reason the unemployment rate declined so dramatically. But there are two things to keep in mind: (a) the participation rate has been shrinking steadily for a long time, and (b) it’s a pretty volatile number from month to month. The chart below shows both things. The participation rate has been steadily shrinking since 2000, and it’s been shrinking even faster ever since the end of the Great Recession. And the big drop in April? As you can see from the tail end of the chart, the participation rate hasn’t actually changed since October. It’s just been bouncing up and down.
Bottom line: Don’t take the April numbers too seriously. The long-term trends are important, but there’s so much noise in the month-to-month numbers that you can’t draw too many conclusions from them.
