Washington's Full Denial on Full Employment

Rather than full employment, November's job report pointed to full denial of America's real situation. On the surface, the report was not bad with 178,000 new jobs and the unemployment rate's drop to 4.6% appeared to be great. However, a mediocre report producing great results should set off mental alarms. Proving the caveat that something too good to be true usually is, this positive short-term result masks a more troubling long-term trend.

When there is a good news-bad news situation, it's preferable to hear the good news first. November's 7.4 million unemployed equated to a 4.6% unemployment rate. This was the lowest since August 2007.

The bad news is that while November's unemployment rate was the lowest in 9 years, the labor force participation rate - those civilians able and looking for work - was 62.7% - and except for July's 62.6%, the lowest in almost 40 years (February 1978). As comparison, in August 2007, when unemployment rate was the same as this November's, the labor force participation rate was 65.8%.

That three percentage point difference seems inconsequential, but it has enormous repercussions across such a large labor force. If this November's had been that much higher, it would have equated to an additional 8 million in the labor force looking for work. Had this been the case, November's unemployment rate would have been doubled to 9.2%.

The bad news, and the long-term trend, is this declining participation rate. When Bush took office in 2001, the rate was 67.2%. When Obama took office, it was 65.7%. Overall there has been a drop of 4.5 percentage points in the last 16 years - with two-thirds of it coming under Obama.

Make no mistake, affluent nations have lower labor force participation rates than less developed ones. In a subsistence society everyone works, if they want to eat. However the comparison here is not between affluence and subsistence, but between today's America today and its very recent past.

What we are witnessing today is a significant reversal that has thrown us back four decades in just 16 years. That this is not due to positive developments is shown by two distinct groups: the those marginally attached to the labor force (those desiring and able to work, who have looked for work in the past 12 months, but not in the past 4 weeks) and discouraged workers (those not looking for work in the past 4 weeks because they believe there is no work available or other reasons). November showed 1.932 million marginally attached workers and 591,000 discouraged workers. While both are lower than any annual average from 2009 through 2015, they are also both higher than any annual average from 1994 through 2008.

Seeing the effect the lower participation rate is having on suppressing the unemployment rate is only half its impact. The other is recognizing the effect if these additional 8 million people were employed.

To understand America's lower economic growth, you must understand that at least part of it is due to a significantly smaller workforce. Today's lower participation rate results in 8 million fewer potential workers. That equates to about 5% of today's potential 159 million person labor force - and it means the economy's engine is running at about 5% below past levels.

Small as it may seem, 5% matters. This is 5% who are not driving the economy, but instead being pulled by it. And their loss productivity compounds over time. This is 5% who are not adding to their skills - as those in the workforce are.

It is comparable to two individuals who initially put different sums into bank accounts. If the first puts $100 and the other $95, the $5 difference is only temporary. Over time it grows. As the two sums compound from interest earned, the second account is soon well more than 5% smaller.

The same applies to the two American economies: today's lower participation rate one and its higher one of the recent past. It is little wonder our economy is running slower and running comparatively more slowly over time.

It would be easy to say that the participation and unemployment rates are the two halves of the story. But the two are not equal. The participation rate is more important. Those who are not employed, but are participating - and would be employed if jobs were available - are simply not working. Those who are not participating in the workforce are not even near-term viable candidates for work. They are twice-removed from the employment picture. And as their skills fall even further behind, they become even more removed.

Obama's employment record is effectively being graded on a curve. It is akin to a rigorous test on which everyone gets less than a satisfactory share of the problems correct. However the grading curve hides the consequences of collective failure. Instead of total failure, some receive high marks despite poor actual results.

The verdict on today's employment situation should not surprise, considering that Obama's economy has been benefiting from the same thing. At first, the economy's lackluster performance was able to appear passable in comparison to the recession that had preceded it. Now as time has passed and it has still not picked up pace, it has been able to look acceptable in context with its own prolonged mediocrity.

Both employment and the economy have survived public scrutiny only by being graded on a curve. In any other class than this of their own making, they would be failing. Instead, they have been giving a remedial performance, but receiving a "Gentleman's C" for their efforts.

Rather than praising the superficial fact that America is employing a higher percentage of its shrunken labor force, it is time to focus on the real problem: Such a small percentage is available to work. And that focus must quickly move to fixing this problem if America's economy is to perform as Americans have come - and have a right - to expect