The Unemployment Rate Does not Measure Labor Market Vitality

Despite what you will hear out of Washington, there is really only one reason that the reported unemployment rate keeps dropping. Each month there are fewer people actually participating in the workforce. The unemployment number you see reported each month is the percentage of the people in the workforce who are unemployed. When the denominator of that ratio drops, the unemployment number drops even though there may be no more people actually employed.

You will sometimes hear that the drop in labor force participation is due to more people taking normal retirement. This may be happening, but take a look at the chart below. Do you think the normal retirement rate suddenly accelerated starting in 2007?

The number of people not working increased by 315,000 this month to a record 92.6 million. Anyway you cut it, that's not good. Fewer people working -- for whatever reason -- means fewer people producing things and (in general) less money to spend buying things. There is no way that the US economy can have robust growth when fewer people are working each money,