NEW YORK (CNNMoney) — The official U.S. unemployment rate is falling, but that’s not necessarily a good thing.
That’s because the slice of Americans involved in the labor force has shrunk to a level not seen in 35 years.
The labor force participation rate — the percentage of people over 16 who either have a job or are actively searching for one — fell to 63.2% in August. The last time it was that low was in August of 1978.
In the latter half of the 20th century, the rate rose steadily for decades as more women were entering the workforce, eventually peaking at 67.3% in 2000. But the number has been on the decline ever since — a trend that was accelerated by the Great Recession.
Economist say there are several reasons for the decline, including the retirement of the baby boomers and fewer students who also work. But the main reason for its recent fall is a lack of good jobs.
“We know there’s a lot of hardworking people that want to be productive, we just don’t have work for them to do,” said Heidi Shierholz, an economist at the Economic Policy Institute.
Schierholz said the labor force participation rate would be going down anyway as the baby boomers retire. But she said that since the recession, between two-thirds and three-quarters of the drop can be attributed to the lousy job market.
“We’re operating way below potential,” she said.
So why is a low rate of labor participation a problem?
There are now 90.5 million Americas who don’t work and are not counted as part of the labor force. This excludes kids under the age of 16 and non-civilians such as those in the military or in prison, but includes just about everyone else.
Many of them are either retired or are high school or college students, according to the Labor Department. But the other 40 million or so aren’t trying to find work for a variety of reasons — they might be rich, they might stay home with kids or relatives, they might be disabled, or they might simply have given up looking for a job.
Whatever the reason, the fact that just over 63% of the population is engaged in the workforce is problematic. It means that a smaller chunk of the population is paying for promised entitlements such as Social Security and Medicare. And if a smaller share of the country is working, it will also act as a drag on economic growth.
“We’re not getting the economic growth or the tax payments that were expected when these promises were made,” said John Silvia, chief economist at Wells Fargo Securities. “It’s disturbing, and it’s going to force choices. We can’t just continue doing what we’re doing.”
By Steve Hargreaves