Michigan's incredible shrinking workforce

NEW YORK (CNNMoney) -- As the presidential race moves to Michigan for Tuesday's primary, a lot of focus is on the state's economy -- one of the hardest-hit by the recession.

But things are changing in the Great Lakes State.

After leading the nation in unemployment for four years, Michigan has finally dropped out of the Top 10. State unemployment slid to 9.3% in December, only a touch higher than the national rate, and a sharp decline from the 14.1% rate that Michigan hit in the fall of 2009.

And last year was the first time the state added any jobs since the turn of the 21st Century.

Sounds great, huh? Well, hold the applause.

The main reason Michigan's unemployment rate is falling is because its labor force is shrinking fast, economists said. The state has lost 4.6% of its workforce since the recovery began in mid-2009, according to Donald Grimes, senior research specialist at the University of Michigan.

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And the state still has a long way to go before it regains the hundreds of thousands of jobs it lost over the past decade.

But let's start with the good news.

2011 was a rocking year for American automakers, the lifeblood of Michigan's economy. It was the first time since 2004 that all three major U.S. automakers were profitable at the same time. And it came only two years after two of them declared bankruptcy and had to be bailed out by the federal government.

That helped fuel the creation of 67,000 jobs in 2011, according to Bruce Weaver, economic analyst at the state Department of Technology, Management and Budget. Michigan gained 26,000 manufacturing jobs last year. It was the second best performing sector behind only professional and business services, which includes temp jobs and engineers and IT professionals who support the auto industry.

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"After a horrendous decade, Michigan is walking in the right direction," said Charles Ballard, economics professor at Michigan State University.

Since the recession ended in mid-2009, some 94,200 jobs have been created. And the number of unemployed has fallen by 239,200. This has helped to bring the unemployment rate down to its lowest level since the fall of 2008.

In fact, Michigan's job growth outpaced the nation's in 2011.

The employment picture has improved so much that jobless residents are no longer eligible for the maximum 99 weeks of unemployment insurance. Those on the federal extended benefit program, which lasts up to 20 weeks, received their last unemployment check in mid-February.

Residents are also feeling more optimistic. Nearly half of those surveyed say the economy is starting to improve, while only 19% expect it to worsen, according to a recent poll conducted by the Detroit Free Press and WXYZ-TV. Those are the best numbers in years, according to the pollster.

Michigan is expected to keep adding jobs in coming years. The state should expand its payrolls by nearly 77,000 jobs by the end of 2012, according to a University of Michigan forecast.

Now for the not-so-good news.

One reason Michigan's unemployment rate is falling is because people are leaving the workforce in droves. Nearly 224,000 residents have dropped out since the recovery began, either because they have left the state, retired, returned to school or are too discouraged to look.

While the ravaged state has definitely been losing residents, that's not the whole story. The population lost only 94,000 people over the past two years.

Another explanation could be the fact that Michigan has more Baby Boomers than other states. When older workers lose their jobs, it's harder for them to find new ones. So these folks might have left the workforce in favor of collecting disability or starting their retirement earlier than planned, Grimes said.

Also, Michigan entered the recession earlier than other states, so more jobless have likely exhausted their unemployment benefits. Since the unemployed have to be actively looking for work to collect benefits, it's not uncommon for discouraged people to stop searching when the checks stop coming.

The overall improvement in the unemployment rate has surprised state economists, most of whom expected the unemployment rate to remain relatively flat. But it's not something they are happy to see.

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A shrinking labor force can wreak havoc on the state's finances because it means less tax revenue coming in and could force more people to seek public assistance, including Medicaid and housing help.

"You want the unemployment rate to fall because people are getting jobs," he said.

And while the addition of 94,200 jobs is certainly a plus, it only puts a tiny dent in the overall job loss since 2000, which exceeds 850,000 positions, Grimes said.

"We're picking up some of those jobs, but we still have a long way to go," he said.