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Why did the labor force shrink so much in April?

The unexpectedly large drop in the unemployment rate from 6.7 percent in March to 6.3 percent in April was good news. But not all the reasons for that fall are positive.

On the bright side, the economy created 288,000 jobs in April, bringing the average gain over the past three months to 234,000. Even more job creation would be helpful given the large number of people who are still seeking work, but this is a solid number. And it's part of the reason for the unemployment rate's decline.

But the other reason the unemployment rate fell is an 806,000 decline in the labor force, and that's not encouraging. Recall that the unemployment rate is calculated as the number of people seeking jobs divided by the labor force. So, unemployment declines when more people find jobs, or when the labor force gets smaller.

Why did the labor force fall by so much? Actually, it may not have.

The 806,000 figure is an estimate that's highly volatile from month to month. For example, the changes in the labor force over the last four months were 523,000, 264,000 503,000, and -806,000. The resulting average of 121,000 additional workers over these four months should give a better indication of where the labor force is headed rather than the figures from any single month.

Still, the large change to a negative number in the most recent data is reason for concern, particularly if it isn't reversed when the May figures are released in early June.

The main reason for the fall in labor force is a large decline in the number of new entrants rather than an increase in the number of "discouraged workers" (those who want to work but can't find a job) exiting the labor force. Plus, the decline appears to be concentrated among younger workers who have not yet decided to begin seeking work.

Some of the drop may also be due to people who have left the labor force in the past and have not yet decided to reenter. That's a bit more hopeful than if the decline were due to a large increase in discouraged workers, but it's still a concern that new entries into the workforce may be stalled.

Given that the monthly labor force figures tend to jump around quite a bit, the most likely explanation for April's large decline is that it's mostly statistical noise and will be smoothed out over the next several months.

But if the number of new entrants keeps stalling as new data arrive, that will be a red flag for sure.

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