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The Dark Truth About the Falling Unemployment Rate The unemployment rate is dropping not because more people are finding work, but because more people have stopped looking for work.

By Ray Hennessey Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

What if the biggest problem with job creation is that Americans don't want to work?

It is a surprisingly fair question when one focuses on the numbers behind the July Employment Situation Report, released Friday by the Bureau of Labor Statistics.

The U.S. economy added 162,000 jobs in July, which was well short of estimates, and the number of jobs added in June was revised downward to 188,000 from the original report of 195,000. May's report was also revised lower.
The unemployment rate, though, ticked down to 7.4 percent from 7.6 percent. That is the lowest it has been since December 2008.

Related: Why Overseas Job Creation is Good for U.S. Workers

It is also one of the most bearish numbers in the jobs report. While some view the unemployment rate as a sign of the health of the economy, it is really just a simple equation involving those who are actively participating in the workforce and those who are employed. Because of this, one typically sees the unemployment rate rise as more payrolls are added, since the number of people looking for work rises as jobs become more available. In recoveries, the unemployment rate almost always ticks higher before starting a steady decline.

That is not happening here. If anything, the unemployment rate is dropping not because more people are finding work – after all, the 162,000 last month is nowhere near enough to keep up with population growth – but because more people have stopped looking for work. If you are not looking for a job over a certain period of time, the Labor Department drops you from its unemployment calculation.

The total number of people considered in the labor force decreased by 37,000, to 155.8 million. The total number of people not counted in the labor force in total in July rose 240,000 to close to 90 million.

That has had an impact on what's known as the labor-force participation rate. This calculates the civilian population that is actually in the job market in one way or another. Because it doesn't exclude people not looking for work, it is usually a better gauge of how many people nationwide are actually working. The participation rate in July fell to 63.4 percent, from 63.5 percent.

Ponder that for a moment: Just 63.4% of the working-age civilian population in the United States is involved in the job market.

Related: Small Businesses Fuel Private Sector Hiring in July

Why so few? Economists have pointed to a number of factors. For one thing, there could be pessimism about their prospects, so some job seekers choose to stay home. More likely, though, is that, having lost their jobs, it is difficult to find work at or near their past pay levels. That is not the job-seekers fault: Many businesses are loath to hire someone who is taking a large salary cut for fear that the employee will continue to look for a better job elsewhere.

Then there is the nature of the workforce. Part-time jobs in July came in at 174,000. Full-time jobs came in at 92,000. (If you're wondering what that adds up to well north of 162,000, the Labor Department calculates full-time and part-time from a different survey than it uses for the headline number.) Some of that may be because of added seasonal summer health, but it is confirms the predictions that Obamacare, with its requirements of health coverage for a certain threshold of full-time workers, would lead to more part-time hiring.

The jobs people have right now aren't great. Average hourly earnings fell 0.1 percent to $23.98. Economists expected that figure to rise. The average work week fell to 34.4 hours, from 34.5 hours – again another sign of an increase in part-time help.

So the job market is soft, and people just aren't ready to look for work since the pool of jobs isn't all that great.

That is why there can't be a meaningful improvement in the job market for quite some time.

First, there is the philosophical problem. America is built on a free-market system where people are rewarded for their labor. Unlike it controlled economies, the system is set up to provide equal opportunities, not equal outcomes. Work hard in capitalism and you will be rewarded with pay and benefits. That benefits the worker, and it benefits the employer (and the state, which derives revenue from the taxes on that relationship).

But chronic unemployment has led to more safety-net programs kicking in, thus taking away an incentive to find work. As a result, the time many workers spend out of the labor force has risen. There is something almost cancerous to the American capitalist system when so many people don't seek work.

Then there is the employer's perspective. While the potential worker is not looking for a job, employers become even less likely to hire them when they do. For one thing, productivity, thanks to innovation and more use of technology, improves every day. Companies that once needed, say, 20, workers to thrive have learned to do so with maybe 16 or 17. There is no reason to hire to get back to pre-recession levels if your profitability has improved with a smaller labor force.

Also, when you don't remain active in the workforce, you are often viewed as less desirable as a potential hire. As you stay home, voluntarily or otherwise, you are perceived as having an erosion of skills. Rightly or wrongly, that's why employers love stealing away a worker from a competitor, rather than offering a job to someone who is unemployed.

So, as more numbers like the July employment report crop up, it is hard to find a narrative that supports job creation. There is more work to be done.

Ray Hennessey

Former Editorial Director at Entrepreneur Media

Ray Hennessey is the former editorial director of Entrepreneur.

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