The Unemployment Rate May Underestimate Unemployment – Millions Have Dropped Out of the Labor Force

An Economy Cannot Produce Goods and Services if People Are Not Employed Producing Goods and Services

While the editorial section of the Wall Street Journal is written and produced by the Usual Gang of Idiot (from Mad Magazine) the news section frequently has news and analysis that is worth reading.  This past week it is an article on the shrinking labor force.

In the past two years, the number of people in the U.S. who are older than 16 (and not in the military or prison) has grown by 5.4 million. The number of people working or looking for work hasn't grown at all.

This is the beginning of an economic catastrophe.  See the economic level of a society is not determined by how many leveraged buyouts take place, or how many exotic financial instruments are created but by how many goods and services are created.  And goods and services are created by people (my friend).  So when over 5 million people are gone from the labor force that is 5 million people not creating products and 5 million people consuming products and services made by other people.

The reason for this decline is in part the weak recovery from the Great Recession and the aging of the population

Is this because members of the big baby-boom generation are now beginning to retire? Have a lot of people dropped out of the workforce temporarily, and are likely to return when there are more jobs to be had? Or are more of the long-term unemployed becoming the never-again employed?

And the long term implications are just not good, in fact they are very bad.

Not only is this a waste of human potential, but it diminishes the rate at which the U.S. economy can safely grow. It also creates a growing cadre of Americans who will need the support of the working population and makes the government budget deficit worse because there will be fewer workers to pay taxes. There's no precise way to measure the size of this contingent. Official estimates of "discouraged workers" understate the problem; they count only those who say they want to work and have looked for a job in the past 12 months.

One thing is clear: The longer people remain out of work, the more risk they will fall out of the workforce altogether. Getting them back to work—or keeping them tied to the job market through training or volunteering or collecting unemployment compensation—would have long-lasting benefits.

And this is not just the United States.  Europe is experiencing a similar, and even stronger problem. 

Many people believe that economic growth is inevitable, that each year their income and wealth will be higher than the previous year.  Many people are going to find out that is just not true.