A comment on a previous post said that the unemployment rate is under-measuring the true unemployment rate due to people having withdrawn from the labor market. The low labor force participation rate would reflect this view. Is the 6.1% unemployment rate a reliable measure of un- and under-employment?

One model for the supply & demand in the labor market plots labor share against a quantity of labor.

Labor on the x-axis can be represented by the unemployment rate.

The graph shows that the unemployment rate followed theoretical limits of supply and demand in the model since the 1950′s.

We can also put the labor force participation rate on the x-axis.

The scatter plot has data from 1950 to 2014. The orange line is 1950 to 2001. The blue line is for data since 2001.

From 1950 to 2001, labor share slowly fell while labor force participation rose. Then in 2001, the pattern broke. Labor share started to fall at a faster pace, and labor force participation began to fall.

The graph suggests that the orange line described the labor demand curve in the model of the labor market… and that the blue line is now describing the dynamics of the labor supply curve. Thus, firms would have had an easier time finding labor before 2001. And we are currently seeing that firms are having a harder time finding labor.

Undoubtedly there are currently demographic influences of many people retiring. However, even as labor force participation has fallen, the unemployment rate has risen to a new level too. The implication is that people are leaving the labor market due to insufficient wages, which would be linked to labor receiving a less valuable share of national income. Labor is then less willing to supply their labor.

This is basic supply & demand. If you are offered a lower value, you are then less willing to supply your good or service… even if the buyer (firms) expects you to take whatever wage they offer because you have to survive.

So…

1. Did the rapid drop in labor share cause more people than necessary to withdraw their supply of labor?
2. Has the unemployment rate risen to a new level due to the lower labor share?
3. Will the labor force participation rate stay low as long as labor share stays low?
4. Is the unemployment rate a true measure of unemployment/underemployment considering the low labor force participation?

I say yes, yes, yes, YES… The numbers are right.

What do you say?