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Sunday, October 28, 2012

Disappointing Labor Markets in the Nation and in Key States

Earlier this year the CBO Budget and Economic Outlook (p 36-37) pointed out that much of recent decline in the national unemployment rate has been due to an unusually large decline in the labor force participation rate. Of course, people who drop out of the labor force—even if they give up looking for a job because they could not find one—are not counted as unemployed. Were it not for the unusual labor force decline (that is, the decline beyond what is due to the aging of the baby boomers and the downturn in the business cycle), the unemployment rate would be “about 1¼ percentage points higher than the actual rate” according to the CBO. This means that the current 7.8 percent is actually 9.1 percent.

Of course, the same phenomenon is occurring at the state level, and affects voters’ views in the battleground states about the effectiveness or ineffectiveness of economic policy. It is difficult to estimate aging and business cycle effects on the labor force at the state level, but an examination of employment can give a pretty clear picture of what is going on.

Consider Iowa for example. Many have noted that the unemployment rate is lower in Iowa than the national average, but that has been the case for decades. What is less well known is that employment has recently been declining in Iowa. In fact, employment is now lower in Iowa than at the start of the recent recovery, meaning that in Iowa the recovery is even weaker than the United States as a whole.

The following chart tells the story. It shows that employment is lower than at the start of the recession, or than at the start of the Obama administration, or than at end of the recession. It also shows a worrisome sharp decline in the past few months. Since May of this year, 26,000 jobs have been lost in Iowa according to the household survey reported by the Bureau of Labor Statistics. The pace of decline is sharper than in the recession.


The reason that unemployment has declined in Iowa even though employment fell is, of course, due to the decline in the labor force. In fact, the sharp decline in employment since May was matched by a 25,000 person decline in the labor force. This sharp decline could not be due to the more gradual aging of the population nor to the business cycle, unless there is double dip in Iowa.