A little math. The unemployment rate is the number of people who do not have a job and are looking for work, divided by the total labor force. Unless the unemployment rate is 100 percent, the numerator will always be smaller than the denominator. When people leave the labor force, it subtracts from both, but because the numerator is smaller than the denominator, it has a proportionally greater impact on the numerator, which means that unemployment rate declines. (Imagine a town with a hundred workers, fifty of whom are unemployed but looking for work. The unemployment rate is 50 percent. 25 of the unemployed give up, quit looking, and leave the labor force. The unemployment rate declines to 33.3 percent: 25 still unemployed and looking for work, divided by 75 total workers). This may seem tedious, but a lot of people do not understand how a declining labor force participation rate drives down the unemployment rate. Here is why the unemployment rates is significantly understated, from Diana Furchtgott-Roth at http://www.economics21.org:
The March jobs numbers, released on Friday, were disappointing not only for the lower level of job creation, but for the continued decline in the labor force participation rate, the share of Americans who are working or looking for work. The participation rate is now at 62.7 percent, equivalent to February 1978 levels.
The creation of 126,000 jobs in March was about half of what was predicted. This number will get revised because it is part of the Labor Department’s survey of establishments, which is not yet complete. The March job creation figure might even get revised back up to 200,000 by the time all the corrections, including annual benchmark revisions, are completed.
In contrast, the steady decline in the labor force participation rate will not get revised, although it may eventually reverse itself with changes in economic opportunities and incentives. The data are derived from a one-time survey of households that is only updated when population estimates are revised. Over the past few years, the trend has been only in one direction—down—despite steady but slow economic growth over the past few years.
http://www.economics21.org/commentary/more-americans-give-looking-work-04-08-2015
To continue reading: The 2014 Unemployment Rate Was Actually 11.4 %
