High Unemployment the New Normal

From Reason.com:

The headline unemployment statistics are wrong. Unemployment is higher than 8.1 percent and it will be for a while.

...The unemployment rate headline number would actually be higher if it counted people who want a job, but have not looked for one in the past month because they are so discouraged by their prospects...

In April 2012, labor force participation was 63.4, the lowest rate since January 1981...

Over the last 20 years, the usual trend is for labor participation to expand as unemployment falls. This is because workers are being added to payrolls, and thus cutting down on unemployment. However ... after the recession ended in the summer of 2009, both participation in the labor market and unemployment numbers have been falling. This suggests that the lower unemployment number is really just because so many people have stopped looking for work. Annoyingly, it doesn’t mean that the nation has increasing employment.... 

Labor force participation is important for economic growth because productivity is directly related to the number of people working in an economy. You can get productivity (increased economic output) from efficiency gains — i.e., bringing in robots to make goods in a factory faster then 100 people can. But usually, American economic output comes from innovation and new businesses that are staffed with living, breathing humans.

Different workers have different productive values, but it is a general rule that as a nation increases its labor pool, its economic growth expands. So part of the reason for the jobless faux-recovery has been the declining size of the American productive work force....

Ironically, the growing productivity numbers actually help make the case that the labor market and economy could be setting into a “new normal” pattern. Consider that growing productivity despite high unemployment does not create incentives for firms to hire. A circular problem then develops where the productivity from efficiency gains leads to weak hiring practices pushing labor force participation further down, which in turn leads to more output gains coming from efficiency rather than economic expansion.

This cycle can be broken, and perhaps it will in the coming years. However, the Congressional Budget Office suggested earlier this year that because the labor force decline is so “unusually large decline over so short a time,” it does not anticipate the situation will change for at least another five years.

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Link: http://reason.com/archives/2012/05/10/high-unemployment-the-new-normal