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One chart that explains Obama’s new economic plan

Missing workers EPI

President Barack Obama's 2015 State of the Union was different than all his other State of the Unions. Obama, for the first time, offered an economic plan that wasn't really about unemployment. And if you want to know why, look at the chart above.

The graph comes from the Economic Policy Institute, and it outlines one of the stranger facets of the recovery. Unemployment has fallen to normal levels — 5.6 percent unemployment was routine in, say, 1995, a year that few remember as some sort of labor market hellscape. But the fall in unemployment isn't just driven by people getting jobs. It's also driven by workers disappearing from the labor market.

The unemployment rate doesn't include everyone without a job. It only counts people who don't have a job and have looked for a new one in the last four weeks. If you don't have a job and, for whatever reason, haven't looked for a new one in the last four weeks, you're not counted as unemployed. And that's a big part of what's brought the unemployment rate down: millions of workers who lost their jobs have stopped looking for new ones.

The measure you want to track here is "labor-force participation": the percentage of the adult population (excluding people in the military, prisons, mental hospitals, and nursing homes) that's either working or looking for work. When Obama took office, it was 65.7 percent. In December, it was 62.7 percent. That's a sharp drop.

There are good reasons for the participation rate to fall. Retirement, for example, reduces labor-force participation, and that's fine — we don't want people to have to work until the day they die. And with the Baby Boomers hitting retirement age, we knew that labor-force participation was going to fall during Obama's presidency — much as it fell during George W. Bush's presidency.

But there are bad reasons for people to be leaving the labor force, too. Being unable to find a job for months on end, despite sending out hundreds of resumes, is a bad reason. Being unable to find a job that pays enough for child care and your bus commute is a bad reason. We should worry about people who drop out of the labor force for those reasons just like we worry about the unemployed.

So to get a solid picture of the labor market right now, you have to do more than look at the unemployment rate. You have to do more than look at the labor-force participation rate, too. You also have to make a judgment about how much of the participation drop comes from demographic factors like aging, and how much is unemployment or underemployment in disguise.

The White House's Council of Economic Advisers took a go at this last summer: they concluded that roughly half the fall in labor force participation was to be expected, and the other half was partly "a cyclical decline in line with historical patterns in previous recessions" and partly "other factors, which may include trends that pre-date the Great Recession and consequences of the unique severity of the Great Recession."

The folks at the Economic Policy Institute also came up with a clever way to do try to tease out the numbers. They unearthed a Bureau of Labor Statistic paper from 2007 — so, from before the recession — called "Labor Force Projections to 2016: More Workers in Their Golden Years". The study included a projection of labor-force participation until, well, 2016. Obviously, in 2007, the BLS didn't know we were about to face the biggest recession in 80 years. This makes their predictions a good proxy for what would have happened to labor force participation without the downturn. EPI compared the BLS predictions to the actual numbers, figuring the difference is attributable to the recession.

Like any projection, the BLS paper might have been wrong. Perhaps labor force participation was always going to fall faster than the BLS thought. But if you take it as a benchmark, the results are devastating: it shows six million workers missing from the labor force. If they were all actively looking for jobs today, the unemployment rate would be 9.1 percent — and no one would be talking about a recovery.

A complicated problem

Unemployment is a straightforward problem: it's people who want jobs but can't find them. Labor force participation is more complicated. Some of those six million missing workers are people who want jobs and have been so thoroughly discouraged trying to find them that they've given up. Some are students in college or grad school. Some are people who can't find a job that pays enough to offset the costs of transportation and child care. Some are members of families that got used to having only one income during the recession and now find it hard to go back.

No one — including the Obama administration — doubts that a big part of the problem here is too few jobs. But now that the economy is beginning to add jobs at a rapid clip, the White House is turning to the other side of the problem: many of the jobs on offer don't pay much, and certainly not enough to pull people back into the labor force. And this, in turn, is part of a longer-term problem in the economy: lower-skill workers haven't gotten a real raise in decades.

If you read the White House's new economic proposals closely, you see them trying to do two things: make jobs pay more by raising the minimum wage and offering various tax credits to workers, and make workers more valuable to employers by making it cheaper for them to go to college. This isn't an agenda that directly tries to create jobs so much as it's an agenda that tries to make the jobs that already exist more valuable to workers, and the workers that already exist more valuable to employers.

Solving this problem matters, and not just for the affected workers. This week, the Congressional Budget Office projected that deficits were going to grow faster than expected because the economy was going to grow more slowly than expected. And part of the reason they think America is going to grow more slowly in the coming years is fewer people are in the workforce.

"This is a very, very big deal," says Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities and a former White House economist. "Maybe the biggest deal. It’s not just that we want people to get back into the job market because it would improve their living standards. It’s also because the economy depends on it."

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