Chart of the Day: Is the Real Unemployment Rate 12.5%?

Some people criticize the way the unemployment rate is measured, since it doesn't include Americans who have left the workforce temporarily, but ultimately will want or need to get a job. If you include these people in the calculation, the labor market picture has worsened since last November, as I explained on Saturday. So Federal Reserve economists can't pretend that the unemployment picture has improved since their last intervention. But what if we went all the way back to January 2007?

At that time, the labor participation rate was 66.4%. In July 2011, it hit a new recessionary low of 63.9%. That 2.5% might not seem like a lot, but it would have meant nearly 6 million more people in July's labor force. If you add those people into the workforce, then the unemployment rate last month would have hit a new high of 12.5%, which is much higher than the official 9.1% reported. Here's how this alternative measure for unemployment would have evolved over the past couple of years:

It is possible that some of those who have left the workforce over the past few years will not return. The primary reason for that possibility would presumably be if older Americans who were laid off simply decided to retire earlier than anticipated, in light of the tough job market. This possibility, however, can be quickly discarded by looking at the employment change for various age groups. So if early retirement is occurring, it isn't having a significant impact on labor market participation. Indeed, the opposite is more likely true: older Americans are probably working for longer due to the hard times.

The implication here is important: even as hiring begins to speed up eventually, the unemployment rate will face a headwind of previously discouraged Americans reentering the workforce in the hopes that they can finally find a job. This is yet another reason we can expect the unemployment rate to remain very high for an extended period.