Usually, when unemployment drops, the number of working Americans increases. But this time around, that hasn’t been true, notes Mark Pawlak, at Keefe, Bruyette & Woods.

The workforce has shrunk instead, for nine out of the last fifteen months. That kind of contraction is a historical anomaly—the last time it occurred was in 1952, when the population was shrinking as well. But today, the population is growing and more people aren’t looking for work who once held jobs. In fact, if the same portion of people were in the workforce as in 2007, holding employment steady, the unemployment rate would be almost thirteen percent, instead of the current reported number, 8.9%.

If unemployment is actually worse than it looks, the Federal Reserve is likely to respond by continuing the stimulus policy, Pawlak concludes.

The key question is how many of the dropouts can return, and how long the process will take. Teenagers were likely to stop working; while 2.2 million of the 6.9 new workers between February 2003 and February 2011, were over 65 years old.

Among the middleaged dropouts, many may need to relocate, retrain or are waiting for better opportunities. Some of the dropouts may be untied to an unsalable home and unable to move for a new job. Pawlak points out that in January, Nevada and California had unemployment rates of 14.2% and 12.4%, respectively, while the jobless rate in North Dakota and Nebraska were only 3.8% and 4.2. He expects that the differences in the states will even out over time, and that the labor force participation rate will rise over the next six months. “Call it optimism but we believe that a large portion of those that have fallen out of the labor force in the 35-54 age group could return were labor demand to pick up for an extended period,” Pawlak said.

In the short-term, that could mean that the unemployment rate will actually go higher with more people actually looking for work. Based on that view, Pawlak thinks the first Fed tightening will occur towards the latter half of 2012, although the Fed Funds futures currently implies a tightening in the beginning of 2012.