Why is the unemployment rate falling so fast? What kind of
stupid question is that?
Sure, the 7.4 percent unemployment rate in July is down from
10 percent in October 2009. But 7.4 percent is higher than any unemployment rate
during or after the 2001 recession, and it’s near the peak unemployment rate
after the 1990-1991 recession of 7.8 percent in June 1992.
Down to 7.4 percent in July 2013. You call that fast?
OK, the unemployment rate is falling fast, considering how
slowly the economy is growing. Let’s look at the yearly growth rates for
inflation-adjusted gross domestic product — that’s “real growth” — from 1963 to
We’ll use the half-year numbers for 2013, just so we can
include this year. Real growth averaged 3.1 percent per year during those 50
There were 14 years when real growth was slower than 2.5
percent. In 12 of those years the unemployment rate went up.
The exceptions are 2011 and 2013. In both of those years,
the economy grew slowly, but the unemployment rate still went down.
Since 1963, there have been 22 years when real growth was
less than 3 percent. In 16 of those years, the unemployment rate went up. Three
of the six exceptional years are 2011, 2012 and 2013.
Real growth from 2010 to 2011 was 1.8 percent. The
unemployment rate dropped from 9.6 percent to 8.9 percent.
In 2012, real growth was 2.8 percent, and the unemployment
rate dropped to 8.1 percent. Real growth so far in 2013 is 1.4 percent, and the
unemployment rate has dropped again, to 7.4 percent.
With the economy growing as slowly as it has, the
unemployment rate should be going up. Instead it’s going down. Why?
Let’s back up the question. Why does the economy have to
grow at all to keep the unemployment rate from rising? Why do we have to run to
stay in the same place?
It’s because the labor force keeps growing. Kids turn 16 and
become eligible to work. Young people graduate from high school and college and
start looking for jobs.
The economy has to grow to create jobs for these new workers
or they’ll be unemployed, and the unemployment rate will rise.
From 1963 to 2011, the labor force grew an average of 1.6
percent per year. From 2011 to mid-2013, it’s grown 0.7 percent per year.
Labor force growth has slowed down, so we don’t have to
create as many jobs to bring the unemployment rate down. An economy growing at
1.4 percent creates enough jobs to employ those few new workers and more.
So why is the labor force growing slowly? Part of the reason
must be the severity of the Great Recession.
The Bureau of Labor Statistics measures “discouraged
workers,” who searched for work without success for so long that they gave up.
If they’re not working and not searching, they’re not counted as part of the
As the economy recovers, discouraged workers usually start
looking again, and the number of discouraged workers declines. But in January
2011, the BLS estimated there were 993,000 discouraged workers, and in July 2013
there were still 988,000.
The recession was so bad — and the recovery so slow — that
hundreds of thousands of people who would ordinarily be looking for work are
still waiting. That makes the unemployment rate fall faster.
The Great Recession was so severe that the labor force
actually decreased for a while. From August 2009 to August 2011, it decreased in
The last time the labor force decreased was July 1962.
Before then, labor force decreases during or after recessions were pretty
Consider 1962. The original 1946 baby boomers turned 16. The
labor force grew fast through the early 1980s as the boomers came of age.
Now, though, the first baby boomers are starting to retire.
It may be that labor force growth will be slower from now on.
These days, it probably takes real growth above 1 percent to
1.5 percent to bring the unemployment rate down, not 2.5 percent to 3 percent.
We should expect continued decreases in the unemployment
rate this year and next, even with our lukewarm recovery. Down is still better
than up, but the falling unemployment rate isn’t really the good news it once