Unemployment Increase Looming?

by Bill Watkins on May 3rd, 2012
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This morning I ran across this piece on five people who have left the labor force.  It a why-and-how-are-they-dealing-with-it type of thing.  What struck me was that four of the five were either back in college or planning on going back to college, some for advanced degrees.

Improving human capital is a reasonable response to long-term unemployment, but college may not be the best way.  Technical schools should also be considered.

But, that is not the purpose of this post.

When people leave the labor force, they are no longer relevant to the unemployment rate.  When they complete their education, or retraining, they will start looking for a job.  At that moment, they become part of the labor force again.  This will drive up the unemployment rate.

How big of an impact will this be?  Based on the numbers from the article, it could be a big impact.  The United States Labor force has declined by 3.4 percent since December 2007, from 66 percent to 63.8 percent.  If 80 percent of the missing workers are increasing their human capital somewhere, as the article would imply, the impact would be huge.

I don’t think the article reflects a representative sample, though.  So, let’s assume only 30 percent are increasing their human capital.

If we had the same labor force today that we had in December 2007, we would have 5.4 million more in the labor force than we do have today.  We’ll call the difference missing workers.  Some missing workers will reenter the labor force and some will not.  To be conservative, we’ll assume the only people who will be reentering the labor force are the ones increasing their human capital.

If 30 percent of those missing workers are increasing their human capital, then 1.62 million will be again entering the workforce.  That’s enough to significantly increase the unemployment rate.  If it happened today, the unemployment rate would rise from 8.2 percent to 9.1 percent.

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