Scary Unemployment Shocker: Labor Force Plummets 1.6 Million Since May 2009

As NewsBusters previously reported, CNBC's Rick Santelli was very disappointed by Friday's jobs report from the Labor Department showing a surprising decline in the unemployment rate to 9.0 percent.

Disappointing is hardly the word I would use for buried inside the numbers was another huge decline in the size of the American labor force that should have economists and government officials fearing for our ability to ever balance our budget or be able to fund our rising expenditures without issuing more and more debt.

As the Bureau of Labor Statistics' Employment Situation Summary stated (emphasis added):

Effective with data for January 2011, updated population estimates have been used in the household survey. Population estimates for the household survey are developed by the U.S. Census Bureau. Each year, the Census Bureau updates the estimates to reflect new information and assumptions about the growth of the population during the decade. The change in population reflected in the new estimates results from adjustments for net international migration, updated vital statistics and other information, and some methodological changes in the estimation process.

The population control adjustments introduced with household survey data for January 2011 were applied to the population base determined by Census 2000. The results from Census 2010 will not be incorporated into the household survey population controls until the release of data for January 2012.

In accordance with usual practice, BLS will not revise the official household survey estimates for December 2010 and earlier months. To show the impact of the population adjustment, however, differences in selected December 2010 labor force series based on the old and new population estimates are shown in table B. The adjustment decreased the estimated size of the civilian noninstitutional population in December by 347,000, the civilian labor force by 504,000, and employment by 472,000; the new population estimates had a negligible impact on unemployment rates and most other percentage estimates.

As the labor force declined by 260,000 in the previous month's report, this means we've lost 764,000 people from the labor force in the last two months.

But that's only the beginning of the story, for the seasonally adjusted labor force that peaked in May 2009 at 154,805,000 now stands at 153,186,000 - over a 1.6 million drop in the past 20 months.

Some might intuititively think this is nothing odd during a recession.

Not so. Both the seasonally adjusted and not seasonally adjusted labor force numbers since 1948 show no such massive declines even during poor economic periods.

Quite the contrary, for the past 62 years, the seasonally adjusted labor force has grown year after year with only one minor decline in 1961 (318,000). For the next 48 years, we experienced not one yearly decline in the labor force until 2009.

If one looks at the not seasonally adjusted numbers, things look even worse. On that chart, the labor force peaked in July 2008 at 156,300,000 plummeting 3.8 million to 152,536,000 last month.

In fairness, the labor force always rises in the summer due to student hiring and is normally low in January as part-timers retained by retailers during the Christmas season are released. But the numbers are daunting and should be very worrisome to policy makers given the coming retirement of millions of baby boomers.

One of the greatest concerns of economists on both sides of the aisle is how we can possibly fund all the Social Security and Medicare needs of these retirees if the pool of employees paying into the system shrinks. But this labor force shrinkage wasn't expected to happen for years nay decades.

Unfortunately, if this has already occurred, and the labor force peaked in either 2008 or 2009 way ahead of schedule, our leaders are going to have to rethink their concept of government expenditures.

Consider that this fiscal year's budget deficit is already projected to be around $1.5 trillion. The Office of Management and Budget expects this will decline in coming years not due to anticipated cuts in spending but instead because of rising tax receipts as the economy hopefully recovers and more people are employed thereby paying into the system.

However, if the labor force has peaked, and is going to continue to decline, it's tough to expect large employment gains that translate into more tax dollars.

This could mean trillion dollar deficits as far as the eye can see heading into the baby boomer retirement period when the amount of red ink will get even worse.

The rosy scenario could certainly be that this decline is only a temporary blip with labor force gains somewhere on the horizon. But as I have noted in the past, the velocity of labor force growth has been slowing for several decades, and was bound to rollover at some point.

With this in mind, it is incumbent upon our leaders to not ignore this shocking population change, for if it is a trend and not just a blip, we had better make adjustments to our government spending habits or we are destined for a far more serious financial collapse than what happened in the fall of 2008.

Readers are encouraged to review Ed Morrissey's take on this drop in the labor force.