Karl Smith - Assistant Professor of Public Economics at UNC-CH & Blogger at Modeled Behavior
Quickly tying together a bunch of threads: My general take is that neither GDP nor the Employment-Population Ratio is a stat we should care about for its own sake. By that same token, in-and-of-itself, I don't consider declines in unemployment from people leaving the workforce to better or worse than declines from people becoming unemployed.
There are lots of reasons, but fundamentally because these are a function of choices people make about their lives.
When lots of people chose to work, GDP will increase, the population-employment ratio will rise, and declines in unemployment will be dominated by folks becoming employed. When lots of people choose to retire, stay in school longer or stay home to raise a family the trends will reverse.
However, its not immediately clear that working is a better life choice than the other three options. Indeed, we generally consider the other three to be luxuries afforded by a wealthy society.
What matters is whether or not the labor market is functioning smoothly. If someone chooses to look for employment will they have hard time. If the answer to this question is no, and yet still few people look, then we have to conclude that from a macro-perspective things are going fine.