As of February 2017, the unemployment rate was 4.7%. This percentage is on par with the natural rate of unemployment (3-5%). However, most people are aware that the current economy and job prospects aren’t as robust as the 4.7% appears.
During Trumps campaign and presidency, he incorrectly pointed to the unemployment rate as miscalculated and misleading. However, there is a larger story around the unemployment rate. Many people examine the denominator, the labor force. As seen in Figure 2, the labor force participation rate (LFPR) has persistently decreased since the 2007 recession. Why hasn’t it recovered since the recession? Just as the employment rate isn’t as good as it seems, the LFPR isn’t as bad as it seems. A decrease in the LFPR can be related to several factors, specifically discouraged workers and an aging population.
Discouraged workers – including elders, mothers, college students, etc. – contribute to the decrease in the labor force. Discouraged workers certainly reveal poor health of the workforce and economy. An aging/retiring generation of baby boomers who previously dominated the labor force also contribute to the decrease in LFPR. Unlike discouraged workers, an aging population is simply an indication of age rather than economic health.
I have not revealed any huge secret – there has always been a greater story around the unemployment rate, or any piece of economic data for that matter. If Trump thinks he is going to significantly lower the unemployment rate, he should be very careful. Much lower, and we may experience an overheating of the economy or inflation. Going forward, the focus should be on improving the background story such as the LFPR, income, etc., rather than just unemployment rate itself.