What Caused the Crash In the Labor Participation Rate?

Workers May Simply Be Giving Up

Zero Hedge notes that the number of Americans in the labor force has dropped to 1978 levels:

The civilian labor force … dropped from 155.3 million to 154.9 million, which means the labor participation rate just dropped to a fresh 35 year low, hitting levels not seen since 1978, at 62.8% down from 63.0%.

And the piece de resistance: Americans not in the labor force exploded higher by 535,000 to a new all time high 91.8 million.

What’s causing the crash in labor participation?

Initially, the number of women not in the labor force climbed to a new high.  This is significant because the labor force skyrocketed in the 1960s when feminism encouraged women to work outside of the home:

As the Washington post notes in a fantastic roundup on unemployment:

The Urban Institute notes [that] what’s happening is that workers aren’t entering the labor force at the same rates they used to. That’s especially true for women, who are much less likely to enter the labor force today than they were in 2002 and 2003. Many of them, the paper notes, appear to be enrolling in school instead or deciding to start families.

An aging U.S. demographic may also play some role in the decline.  As the Washington Post notes:

Americans over the age of 65 are much less likely to work than prime-age Americans. And since that subset of Americans is expanding its ranks, that drives the labor-force participation rate down.

***

Economists disagree, however, on exactly how much demographics are responsible for the current fall in the participation rate. The Chicago Fed estimated in 2012 that retirements accounted for one-fourth of the drop in labor force participation since the recession began. Other analysts, including Barclays, have suggested that aging Boomers could account for a bigger slice of the drop.

Meanwhile, a recent paper by Shigeru Fujita of the Federal Reserve Bank of Philadelphia staked out a more nuanced view: Demographics, he argued, didn’t play a huge role in the labor-force drop between 2007 and 2011. But since then, retirements are responsible for basically the entire fall of the participation rate. One possible reason is that many older Americans postponed retirement immediately after the financial crisis to rebuild their battered 401(k)s. By 2012 or so, they began retiring en masse.

However, Zero Hedge and Bloomberg show that there are countervailing trends:

Most disturbingly, the Post notes that the main factor may be workers simply giving up:

The number of Americans working or actively seeking work has actually fallen faster than demographers had predicted:

epop graph-thumb-615x395-82792

And here’s another clue that this isn’t just a demographic story: The participation rate for workers between ages 25 and 54 fell sharply during the recession and still hasn’t recovered. Obviously, retirements can’t explain this:

Credit: Calculated RiskCredit: Calculated Risk

So, what’s going on? One theory is that the weak job market is causing people to simply give up looking for work — they’re crumpling up their résumés and going home. An recent study from the Boston Fed suggested that these “non-inevitable dropouts” might even account for most of the decrease. Among other things, the authors noted that the labor-force decline has been far sharper for all age groups than simple demographics would predict.

***

So, why does the size of the labor force matter? If people are leaving the labor force for economic reasons (and they’re not going back to school), it would mean that the economy is in much worse shape than the official unemployment rate suggests. The jobless rate is officially 6.7 percent, but that only counts people who are actively seeking work — not labor-force dropouts. [Remember, you have to include labor-force dropouts in order to arrive at a useful unemployment number.]

The size of the labor force also goes a long way to determining America’s growth prospects. If, say, baby boomers are retiring faster than expected, then long-run U.S. economic growth will be lower than projected.

***

It could also mean the U.S. economy will be significantly weaker in future. One recent paper from the Federal Reserve estimated that America’s economic potential is now 7 percent lower than it was before the financial crisis — in part because workers who lost their jobs during the downturn have become less-attached to the labor force. That’s a bad sign.

In other words, the crash in labor force participation rate is a very significant indication that all is not well with the economy.

Unfortunately – instead of helping to reduce unemployment – bad government policy has made it much worse. And see here and here.

This entry was posted in Business / Economics, Politics / World News. Bookmark the permalink.
  • iDonald

    Thank you for this concise clarification of the employment picture.

  • gregoryvii

    More fruits of the Socialist-Democrat party.

  • Tonto

    All this is just more of the ongoing nefarious message so common here on WB, a socialist-leaning portraiture of the reality landscape. It gets nauseating to read and to respond to it. The emphasis on WB is too often a gleeful negative trending of the labor class, just like it is similarly portrayed here as a class warfare between the wholly fictional, though Marxism reinforcing, 99% and 1%. There is no such thing as the labor class. There is no such thing as the 1% or the 99% And to look at these strenuously collected terminologies, and the attending numbers, charts and graphs, as if they are some reliable representation of some tangible or even comprehensively fungible reality, is not only absurd, it is intended to portray something about our reality that is simply completely untrue.

    Ask any entrepreneurial soul what it is that they are doing that is important to them, what it is that they think could make a difference in their future, or, perhaps the future of others around them, and it is quickly discovered this -something- has nothing whatsoever to do with their participation in anything that will get them to show up as a blip or even a shadow in the so-called labor market. I am sorry, Barack Obama, the government does not give anyone the opportunity to make a better future for themselves, or anyone else.

    The commonly loosed and wholly inept expression “labor market” is a term that was spawned by the mud-sucking pollywogs of Marxist socialism. It has no meaning beyond what the dregs of society are doing for their current excuse for their incredibly miserable existence. Labor all you will. But dream you fat, lazy assholes! And do something with those fucking dreams!

    What is important in this socioeconomic reality is not how Marxist terminology is bandied about as erudite. But instead what is important is what is being done by entrepreneurs, as individuals, and by what they think is important. The vast depth of continuing entrepreneurial initiative does not show up in the “labor market”.

    There, in gauging the depth and quality of entrepreneurial efforts only, will one find the true predictive measure of the future so often feigned by these phony-analysis-laden Marxist tracts that are spewed incessantly in the alternative media. There’s nothing enlightened about these Marxist tracts. There isn’t even anything that is socially redeemable about being part of the labor market. Those whose focus is on the labor market are doing little more than writing about common parasitic worms in our society. The laboring class in our society is made of perverts, drunks and drug addicts. They are not generally socially prosperous or intellectually well-healed.

    The enlightened entrepreneurial class leads the world. And as entrepreneurs, those in this enlightened class are appalled by socialist whiners like Carl Herman and Ellen Brown, and, the negative class warfare paradigm that is so often being portrayed here on WB. The entrepreneurs of the enlightened class feed, house, cloth, educate and entertain the world completely. Those reactionary and entranced social zombies who tread water as laborers, or who point out the currents in the dregs of the laboring class are not even part of the equation of this reality. The labor class is made of drones who maintain the past with a parasitic lethargy, meant only to protect their own part of the larder in what is a dead and dying in society. They are by scavengers feeding on the dead carcases of the toil of yesterday’s entrepreneurs.

    Every educator and laborer in the world could be taken out and shot tomorrow, and there would be no difference at all in society. Anyone can be an educator. Anyone can be a laborer. But if the entrepreneurs who toil on their own dime and in their own time are removed from society, humanity would crumble into an abyss of decay that would portend the end of the world in a fortnight.

  • Patriotic Falcon

    Let me try to channel Tonto, he’s on to some hate here:

    Do something with your lives you lazy bums! Do it like Lockheed or Bank of America! Pull yourself up by your own entrepeneurial grit and without food, you lazy socialist pubic education fappers! Reds!

    This can’t too far off from how a sizable number of folks thoughtfully consider these enormous problems. How about getting people in this country working, instead of blaming people as an excuse for cruelty.

    • Tonto

      Yeah. Blame the government. Blame the world! Blame the fucking “1%”! Blame everyone but the lazy, fat, asshole in the mirror that is so sure he has the world figured out.

      Well, let me tell you this, you anonymous, rambling piece of Internet shit… If the government is enabled to do something, and it far too often is enabled to do something… Do you know what they will do? The government will ALWAYS do something that benefits the government and their well-to-do friends. They lie to get elected… Duh!

      These people who are crying for the government to do something are just mandate-fodder for more proactive government deceit and graft.

      Like hope and change. You’ve all been gaffed, bigtime. You assholes who voted for Obama’s hope and change… What did you get? You got a half-billion dollar graft gift for an ObamaCare web site that isn’t worth the server it resides on. You got billions of dollars worth of graft gifts for solar power companies that are now closing up shop because they never knew how to make a decent solar panel anyway. You got an economic recovery that is nothing but data manipulation. You got a king and queen who live like there is no tomorrow.

      That’s what you got, Mr. Aching Belly!

      All this belly-aching and finger pointing going on on the “alternative media” isn’t worth a rat’s ass. If you want something, then either get out there are make it, or steal it. And when you are ready to make one of these clownish Utopian dreams come true for all the starving whining, assholes in the world, do it with the money you have saved up.

      Otherwise, historically it’s been proved it just ain’t gonna happen. Got it?

  • Brick By Brick Investing

    All is definitely not well with the economy!

    • Tonto

      All is not well in the deluded minds of many Americans.

      The tide is shifting from self-reliance toward having far too many Americans looking for solutions to come from others. –>>These people here on WB think they can vote and follow their way into a better future.<<–

      I've got a surprise for them all. You're just another stinking stupid a sucker if that is what you think.

  • http://fenello.com/ Jay Fenello

    Doesn’t “dropping out” of the labor market really mean that your unemployment benefits have ended?

 

 

Twitter