Why have millions of Americans given up looking for work?

The August jobs report sent chills through Wall Street and Washington because of one eye-popping number: 368,000 Americans gave up looking for work. That makes 7 million people not counted as part of the labor force who want a job.

By , Staff writer

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    Job seekers fill out applications at a construction job fair in New York last month. Employers added just 96,000 jobs in August, the US Labor Department reported Friday.
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A day after Democrats finished their convention in Charlotte, “the hangover” began, quipped GOP nominee Mitt Romney. That would be the US jobs picture, which not only shows few signs of improving, but is starting to look to many economists like a new normal.

New jobs numbers for August, released by the Bureau of Labor Statistics on Friday, showed that the unemployment rate decreased to 8.1 percent from 8.3 percent, a fact overshadowed by a far more startling number:

The rate didn’t tick down because 96,000 people found work. It ticked down because 368,000 able-bodied American workers stopped looking for work and dropped out of the labor force. That makes 7 million people “not in the labor force … who currently want a job,” as the BLS counts them.

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RELATED: Unemployment rate: How many Americans are really unemployed?

Seen another way, civilian labor force participation dropped to 63.5 percent, the lowest point since 1981, even as another 13 million Americans – the officially unemployed – continue to look for work and be factored into the unemployment rate by the BLS.

“Income growth is zero and employment growth for all intents and purposes is zero,” says Edward Stuart, an economist at Northeastern Illinois University, at Chicago. “People quit looking for work … there’s a discouragement factor.”

If there’s discouragement, there’s certainly despair, as well. Only 1 in 5 unemployed workers are getting any kind of unemployment insurance. Having seen benefits run out, millions have flocked to claim disability insurance from the Social Security Administration, in order to get up to $1,300 a month for being too stressed or pained to work. Food stamp participation is at historic levels, all of which is feeding an economic carousel: There’s precious little money for Americans to spend, so therefore no growth, and few jobs.

“Job market improvement could encourage this group to start spending more, but it will take a lot to get them to spend anywhere near what they did in early 2008, before the financial crisis,” Gallup reports.

Nevertheless, the new jobs numbers, Wall Street analysts say, will likely drive the US central bank to act, especially after Fed Chairman Ben Bernanke pointed last week to the weak labor market as a grave problem for the nation.

The problem for central bankers, according to a paper titled “The US Labor Market: Status quo or a new normal?” is determining whether high unemployment is a structural or cyclical problem?

While the central bank can tweak its policy to correct a cyclical problem, it can’t do much to correct a structural problem in the economy. That may require more dramatic actions by the executive and legislative branches.

The paper, written by Stanford University’s Edward Lazear and the US Census Bureau’s James Spletzer and presented at a Fed retreat last week in Jackson Hole, Wyo., directly addresses the unforeseen problems with long-term unemployment, which is currently at a record 42 percent of the total unemployed, up from the previous record of 26 percent in 1983.

While noting that such a huge change in the long-term unemployed rate may indicate a cyclical problem likely tied to the mismatch of workers’ skills to new jobs, Messrs. Lazear and Spletzer still call the long-term unemployment rate “troubling.”

In the end, they note, “The current recession does not appear fundamentally different from prior ones, except that it’s worse,” and they conclude that the situation is cyclical and thus tweakable by the bank.

A big focus of the Fed, as it meets next week to consider buying bonds and Treasuries in order to prod economic growth, is the youngest rungs of those 7 million idled Americans.

Youth unemployment has hovered around 13 percent (22 percent for young African-American job-seekers), and much has been written about the 20-somethings who, as vice presidential nominee Paul Ryan said, are living at home and “staring up at their fading Obama posters.”

The political implications of the jobs picture are enormous. During the Democratic convention this past week, President Obama said new trade opportunities could create a million new manufacturing jobs, but Democrats seemed to talk more about women’s rights than the unemployment rate or the growing ranks of the poor and very poor.

The jobs picture is clearly testing Obama’s call for patience for his infrastructure-focused plans to work. “We need to create more jobs faster,” Obama acknowledged Friday in New Hampshire. “We need to fill the hole left by this recession faster."

Hang in there. It’s a tough message for the President to sell as congressionally-extended unemployment benefits are scheduled to come to a hard stop this Christmas, meaning no more checks for 3 million former American workers. 

Republicans have their own, equally serious problem: If Mitt Romney can head a real recovery by boosting domestic energy and lowering the costs and tax implications of investing, how much will the American middle class actually benefit? 

RELATED: Unemployment rate: How many Americans are really unemployed?

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