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Ian Brinkley
Economic Advisor
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Ian Brinkley

Can unemployment fall for the wrong reasons? The exceptional experience of the US

Authors: Ian Brinkley Ian Brinkley

19 September 2013

One of the big labour market debates in the US is whether the recent unemployment figures overstate the strength of the recovery. Some commentators have asserted that unemployment has fallen for the “wrong reasons”, driven as much by fewer people participating in the labour force as increased jobs. This view certainly seems to have been one factor in the Fed’s decision to continue to inject money into the US economy, postponing the inevitable increase in US interest rates.

Participation is measured in different ways, but however it is measured the conclusion is the same – US labour force participation is at best stagnant and at worst falling despite a stronger recovery in the US labour market than in most of the rest of the OECD.

Why US participation is falling is a matter of debate. Some point to longer term demographic factors that were pushing down the participation rate even before the recession hit, especially the retirement of Baby Boomers. Others have pointed out that participation rates have fallen for prime age workers, and the decline in this recovery has been driven by fewer people - especially younger women - entering the workforce, not more people exiting.  Another suggestion is that participation rates in the US take time to catch up and some of the decline is cyclical. 

Welfare changes have appeared on both sides of the argument. Some have drawn attention to increased claims for disability benefits, while others have pointed out that more generous unemployment benefits provide incentive for workers to remain in the workforce. Others rather less plausibly have blamed over-regulation and taxation of US business and even “Obamacare”.

However, what is striking is the exceptional behaviour of the US labour market. Most OECD economies – including the UK - have experienced similar and in some cases more acute demographic pressures, and have seen participation rates go up both before and since the recession.

The most up-to-date internationally comparable statistics show the activity rate for the working age population (the share of people in work or actively looking for work between the ages of 15 and 64) has increased between 2010Q3 and 2013Q1, for almost all other OECD economies.  In the UK, participation rates between 2010Q3 and 2013Q1 went up from 75.7 per cent to 76.5 per cent, while in the US they declined from 73.9 per cent to 73 per cent.

The US Fed is clearly operating on a more sophisticated view of the labour market than a single simple indicator such as the unemployment rate. Taking account of participation is also important.  However, so far, few studies seem to have looked at why the US appears to be so exceptional in this recovery. This may be one occasion when the policy debate around participation in the US might be usefully informed by lessons from the more successful European economies.