The Federal Reserve saw this coming.

The jobs report released Friday by the U.S. Department of Labor revealed that 288,000 jobs were created in April, the biggest gain in more than two years, and that the headline unemployment rate dropped 0.4 percentage points to 6.3%, the lowest level in 5½ years.

Great news, right? Not necessarily.

The unemployment rate tumbled in April not because of all the new jobs created last month but rather because more than 800,000 people either stopped looking for a job or left the job market for other reasons (retirement, for example).

When people stop looking for a job they are no longer counted by the government as part of the workforce, which means they aren’t included by the Labor Department as part of the survey used to determine the unemployment rate.

The result is that many thousands of unemployed Americans aren’t counted as such, which helps push the unemployment rate lower but masks the fact that all those people are still out of work.

This dynamic has been a primary factor in driving the unemployment rate lower since the last recession ended more than five years ago.

Meanwhile, the labor force participation rate, a key gauge of the percentage of working-age Americans currently employed or actively seeking a job, fell to 62.8%, matching lows hit in December and October, which had not been seen since March 1978.

Unlike the unemployment rate, which only counts people who are either working or looking for work, the labor force participation rate considers all working-age Americans, fewer of whom are actually working these days.  

“The employment report issued today is good and welcome news," said Bob Funk, CEO of Express Employment Professionals and a former chairman of the Kansas City Federal Reserve. “But every silver lining has a cloud and the number of people who have quit looking for work is a real cloud in today's economy.”

Again, the Fed saw this coming and that’s why members of the policy setting Federal Open Market Committee decided in March to discard a 6.5% unemployment rate threshold set a year earlier for possibly raising interest rates.

At the time the threshold was set in early 2013 the unemployment rate was hovering near 8%. The rate fell rapidly throughout 2013, but largely because people were leaving the workforce.

The Fed recognized what was happening and by discarding the 6.5% threshold earlier this acknowledged what many economists were already saying -- that the headline unemployment rate was no longer a reliably accurate indicator of the broader health of U.S. labor markets.

While monthly labor reports provide little more than a snapshot of the overall jobs situation, the inability of the labor force participation rate to rise despite signs of momentum across the rest of the economy has emerged as central problem of the post-recession recovery.

Two primary reasons have been cited for the low participation rate: people leaving the workforce in droves because they’ve given up in frustration on finding a job, and the large numbers of baby boomers who are reaching retirement age.

The first reason is known as structural, in economic jargon, because it means something is broken in the economy and needs to be fixed in order to ensure that people who want jobs can find them. The second reason is known as cyclical because it stems from a demographic trend, one that will eventually play itself out.

Economists – notably those working at the Fed – have yet to reach a solid conclusion on which factor is playing the more significant role in pushing people out of the workforce.

In any case, many large U.S. businesses such as banks have decided post-recession to keep costs low by maintaining minimal payroll levels -- or by cutting staffs even further. That’s made it very difficult for those looking for a well-paying, full-time job to find one, and could keep it that way for a while.

Follow Dunstan Prial on Twitter @DunstanPrial