The 7.5% US unemployment rate, at its lowest level since 2008, seems to be telling a story of slow-but-steady recovery after the Great Recession and Financial Crisis. Unfortunately, the bulk of evidence suggests the “real” jobless rate is far higher. As the U-3 rate has fallen, so has the labor force participation rate, or LFPR. If the LFPR were at the same level as when the downturn began, the unemployment rate would be a stunning 11.3%.
Two critical questions: First, how much of the 2.7 percentage point drop in labor force participation since 2007 reflects structural forces rather than weak demand discouraging workers? Second, is the key structural element mostly the aging of the US population or is it the shift of the workforce into Social Security disability?
A new study by Goldman Sachs, partly based on recent Federal Reserve research, offers some reasonable answers. The real jobless rate is probably more like 9%, still dreadful. And here’s why:
1. Blame the baby boomers, at least somewhat. Of that 2.7 percentage point drop, 1.2 percentage reflects demographics — a number GS arrives at by plotting the overall LFPR against a rate that assumes an over-16 workforce not aging. So most of the drop in the LFPR is not due to the boomers.