Posted Wednesday, Oct. 31, 2012, at 4:21 PM
Apropos of nothing other than the fact that this has been bugging me for a while, something I often hear people say is that the unemployment rate would be even higher today if not for the fact that labor force participation has contracted. I understand what people are trying to convey here, but it's worth saying that this isn't really true.
Now here's what is true. Suppose people who have in fact dropped out of the labor force chose to lie to surveyors and say they're actively looking for a job. In that case, the measured unemployment rate would be higher. But by the same token if unemployed people chose to lie to surveyors and say they had jobs then the unemployment rate would be lower. In both cases, these are counterfactuals about measurement error. What you want is a counterfactual economy about the real world.
Here it's worth recalling that we have thirteen states where the unemployment rate is below six percent. One thing a person might do after trying and failing to find work is to drop out of the labor force.
But an alternative would be to move to a low-unemployment state and go look for work there. So a good counterfactual would be, "what if instead of dropping out of the labor force some of these peopel decided to leave their friends and family behind and move to North Dakota or Oklahoma or Vermont?" I think it's pretty clear that the unemployment rate would be lower. The migrants would find jobs at above-average rates. They would also allow the economies of these strong labor market areas to operate more efficiently, pushing the overall production possibility frontier outwards. And last but by no means least, an initial wave of migrants would spur further migration. One great reason not to move to Nebraska in search of work is "I don't know anybody in Nebraska and don't even know how I'd go about searching for a job there." But if more people moved to Nebraska, then more people who haven't (yet) moved to Nebraska would know somebody who lives in Nebraska. That's both a social support system and a potentially useful job-seeking network.
And I think if you look at it that's going to be true down the road. As long as people who've given up looking for a job adopted genuine alternative plans the unemployment rate would fall, not rise. It only goes up if you assume people are pretending.