When An Unemployment Rate Decline is Bad News

The decline in the jobless rate is not the positive news it may seem to be.

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The U.S. economy added 115,000 jobs in April, with the jobless rate shifting down slightly to 8.1 percent, marking a slowdown from February's 259,000 jobs added and March's 154,000. The latest jobs number comes as a disappointment—many analysts had predicted growth of 160,000 jobs or more, and 115,000 is not quite enough to keep up with population growth.

[See a gallery of Americans searching for work.]

The incongruous unemployment rate decline accompanying such anemic job growth is a sign of a troubling trend: a shrinking labor force. The unemployment rate is calculated as a percentage of people either with jobs or looking for jobs. When that number shrinks, the unemployment rate can also fall, even without substantial job growth. In April, the labor force participation rate fell to 63.6 percent, the lowest it has been since 1981.

"The drop [in labor force participation] has stayed there. It hasn't disappeared as the labor market has started to improve," says Matt Slaughter, associate dean of the Tuck School of Business at Dartmouth and a former member of President George W. Bush's Council of Economic Advisors. With such a prolonged dip in the participation rate, he says, there is now the question of whether this is the new normal.

"How much of this big drop in the labor force participation rate will end up being permanent?" Slaughter says.

One fear is that some workers who have dropped out of the workforce will be permanently off of payrolls, meaning that the U.S. economy loses their productive capacity for good.

"If you look at how the employment numbers have gone over the last couple of years, many people have left the job market and have left the civilian labor pool. I think the big question is, will they come back?" says Scot Melland, president and CEO of Dice Holdings, which sponsors recruitment websites.

"The fear is if those [who have dropped out] are people who need the income and have those skills ... that damages the U.S. economy overall if those people choose not to try to find a job again," Slaughter says.

[See why long-term unemployment isn't going away.]

The April numbers continued recent industry trends, with certain industries showing continued growth and others remaining stubbornly weak. Healthcare and social assistance, which has grown steadily during the recovery, added 18,400 jobs, while professional and business services grew by 62,000 jobs. Meanwhile, construction lost 2,000 jobs and government shed 15,000, continuing their trends of shaky job numbers.

"This has not been a broad-based labor recovery," Melland says. "There have been winning sectors and losers."

Some unevenness between industries' growth rates is normal, but for a strong, stable recovery, there will need to be improvement even in the weaker sectors, says Slaughter.

"Certain industries are growing faster than others," he adds. "But right now the challenge for the U.S. economy is that you need lots of industries expanding employment."

[Read about this week's ADP jobs report.]

That consistent weakness in particular industries could be one factor keeping some workers out of the labor force. A broader measure of the unemployment rate that includes people who have given up the job search, the U-6 rate, stopped its steady slide last month. That rate fell from 16.4 percent in September to 14.5 percent in March, where it remained in April—making it the first time since September that the U-6 rate has not declined.

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via e-mail at dkurtzleben@usnews.com.