Why this month's lower unemployment rate isn't great news

The unemployment rate is probably the best-known statistic about the job market. And it fell in February from 5.7 percent to 5.5 percent.

Here's why that might not be as great as it sounds.

There are two ways people can leave the ranks of the unemployed, as that term is defined by the Bureau of Labor Statistics. One way is to get a job — obviously good news. The other way is to have so much trouble finding a job that they stop looking altogether. If they can afford it, they might retire early. Or they might become stay-at-home parents, move in with relatives, go on disability, and so forth. This isn't necessarily good news.

An important clue to why the unemployment rate is falling is the labor force participation rate, the share of all adults who are employed. This rate fell slightly in February, from 62.9 percent to 62.8 percent. That suggests a big chunk of that falling unemployment rate was due to people who stopped looking for a job.

Another way to look at this, though, is through the broader unemployment measure known as U-6. This figure includes everyone in the standard unemployment measure plus people who can't get as many hours as they'd like and people who are "marginally attached" to the workforce — meaning they'd like a job but are not actively looking for one. The U-6 unemployment rate fell by an impressive 0.3 percentage points in February, from 11.3 to 11.0 percent. So the number of people who say they want a job but don't have one is falling.

Labor force participation has been falling for 15 years

The current fall might be part of a longer-term trend. As you can see from the chart below, the rate peaked in 2000 and has been basically falling ever since. So it's possible that long-term economic forces, particularly the aging of the population, explain more of the recent decline than fluctuations in the business cycle.

Labor force participation rate. (Bureau of Labor Statistics)

On the other hand, a sufficiently strong economic boom should draw some people back into the labor force. When the labor market is really tight, employers start raising wages and beating the bushes looking for workers. Rising wages and plentiful job opportunities entice some early retirees and stay-at-home parents to get back into the job market. We haven't seen a job market like that since the 1990s, but it would be great to see it emerge later in the decade.

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