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Dropout Factories and America’s Unemployment Rate

The unemployment rate, reported this morning, stayed relatively steady at 9.6 percent in August. But there are 1.1 million discouraged workers that don’t show up in that stat, who, at the same time, ironically contribute to its stubbornness. 

Since the beginning of the recession, the U.S. population 16 and older grew by 4.7 million, but the labor force--the employed and unemployed actively seeking a job--actually shrank. Many of the people who dropped out of the labor force are part of the growing share of discouraged workers who have given up on their prospects of finding a job. If, when, and where these “missing workers” re-enter the competition for jobs, it will place further upward pressure on the unemployment rate. Underemployment, a more inclusive measure of unemployment that factors in discouraged workers and those wannabe full-timers, stands at 16.7 percent.  

Although there is no good measurement for this stuff (labor underutilization, to be technical) at the local level, we know that 21 of the largest metropolitan areas saw the number of people in labor force decline between 2007 and 2009. The chart below (keep reading) ranks the metros which have seen the biggest gaps between growth in the labor force and the working age population (age 18 to 64).

In metro areas like Birmingham, Toledo, and Grand Rapids where the working-age population grew, the size of the labor force still declined between 2007 and 2009. (Note that the large gap in Provo is due less to a declining labor force as it might be to increased higher education enrollment, mainly at BYU). Not only does this suggest that people dropped out of the labor market in these metros, it also suggests how inflexible their labor markets are. Despite seeing 8 to 12 percent of jobs disappear, the unemployed in these metros--and those who have dropped out of the labor force--still call these places home. As these job markets strengthen (in Birmingham, regional output and employment have seen recent quarter-to-quarter increases), many people who dropped out of the labor market will re-enter the in search of work. See here for a quarterly ranking of metros and their progress.

On the other end of the scale, Mc Allen, Bakersfield, and Modesto saw their labor markets far outpace total population gains. McAllen, for example, saw a growth of 9 percent in labor market participants, while their working age population grew about 3 percent. It was also the only metropolitan area to consecutively gain jobs through 4 quarters between 2009 and 2010. But McAllen isn’t every metro.

Certainly, the unemployment rate is already less meaningful than it was a month ago … and the month before that. With the climbing rate of underemployed persons and “missing workers,” we need to take note of who that number doesn’t include--and where they are. Even if the job markets in places like Birmingham, Toledo, and Grand Rapids can absorb all of their “missing workers” who re-enter the labor force (unlikely), it will take time. Until then, the inflow of people back into the labor market will help sustain the unemployment rate at relatively high levels in the short to medium term.