Brad Delong suggests that its evidence of weak aggregate demand
What we saw in November, instead, was a 15 basis-points decline in the unemployment rate generated by more people at work. That is welcome. But most of the decline was a 25 basis-point decline generated by a fall in labor force participation. Workers as a group did not become more optimistic about their long-run employment opportunities, but rather less. That is not welcome. It is harder to pull people into employment if they are out of the labor force than if they are in the labor force and unemployed. Hence the fall in the labor force participation rate leads us to mark down the long-term potential output growth path of the American economy.
This has a lot of intuitive appeal, my concern is that when we think about the labor market failing to clear we mean to say that there are people looking for jobs who cannot find them.
If they stop looking this is not obviously a market failure. If it is in fact the case that the real wage is not enough to entice them to work, then they should not work.
If we were seeing a great stagnation, a supply shock, or even certain forms of hangover, this is how it should manifest itself and from a business cycle perspective does not represent any malfunctioning of the market system.
We might feel that this result is unfortunate but then what is truly unfortunate is that the marginal product of labor is too low.