America’s labour force and the economy: The missing five million

May 4th 2012, 20:55 by G.I. | WASHINGTON, D.C.

THERE’S a short term and a long-term story in today’s job numbers. The stock market did not like the short-term story, and fell sharply as a result. But the short-term news is not as bad as it looks, while the long-term news is actually quite disturbing.

Let me explain. The sharp deceleration in employment growth in the last two months probably does not point to a sudden slowing in economic growth but rather tells us that the more brisk pace of growth earlier this year was unsustainable because much of it was due to warm weather. A useful gauge is the number of people not working because of weather. Morgan Stanley says this tally was unusually low during the winter, but in April it returned to normal levels. This suggests the weather payback effect is largely over.

A second factor technical factor is that there were only four weeks between the March and April periods during which the Bureau of Labour Statistics counted the number of jobs, which often reduces the measured total of new jobs created. And finally, while the decline in employment as measured by the household survey was troubling, it does not portend weakness ahead; household employment has run well ahead of payroll employment in the last 12 months and some retracement was in store.

Now for the bad news. The fact that things were never so great simply reinforces the picture of underlying sluggishness. True, the slide in the unemployment rate – a full percentage point since September – owes mostly to rising employment (as measured by the household survey). But the decline in unemployment has been helped by the failure of the labour force to grow more quickly. After growing for several months, it shrank in April. While it has fluctuated considerably, the labour force is only slightly larger now than in December, 2007, when the recession began. Yet in January, 2008, the Congressional Budget Office reckoned it would be some 5m larger by now, or 159.5m (see chart). What happened to those 5m people? Why aren’t they showing up as unemployed? Some are discouraged workers or other people who want to work but aren’t counted as unemployed; but I reckon they account for only one third of the missing 5m.

So what about the others? Is it early retirement? Disability? Returning to school? Illegal immigrants returning home (or failing to enter the country in the first place)? Or were they never there to start with – the labour force simply isn’t growing as quickly as we thought it should, for demographic or other reasons? Whichever it is, it is a troubling sign that our economic potential could be a lot lower than we thought just a few years ago. And that’s the real bad news from today’s report.

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