Real Culprit Behind Smaller Workforce: Age

Americans are leaving the labor force in unprecedented numbers. But the trend has more to do with retiring baby boomers than frustrated job seekers abandoning their searches.

The share of the population either working or looking for work in March hit its lowest level since 1979. The measure, known as the participation rate, now stands at 63.6%, down from 66% when the recession began. That represents close to seven million workers who are now “missing” from the labor force.

The April jobs report, coming Friday, probably won’t repeat March’s historic decline, when the labor force shrank by nearly half a million workers. But it likely won’t show much improvement, either. The participation rate has trended downward through both the recession and the recovery, continuing to fall even as other measures of economic well-being have improved.

The falling participation rate raises two main fears among economists. First, it could suggest that the labor market is even weaker than it appears. The unemployment rate, for example, fell to 7.6% in March, its lowest level since late 2008. But that figure only includes people who are actively looking for work. Add back the missing millions and the unemployment rate would be 11.4%.

The second fear is that if unemployed workers are giving up on finding jobs, they could drift so far from the labor market that they will be unlikely to return even when hiring picks up. They will go on disability insurance—8.9 million Americans were receiving federal disability payments in March, up from 7.1 million when the recession began—or other government benefits, retire earlier than planned, or work for cash in the gray economy. That could create deeper structural problems that could persist long after the rest of the economy heals.

A close look at the numbers suggests both fears, though real, may be exaggerated.

For one thing, the participation rate was falling long before the recession, and that drop would almost certainly have continued even if the downturn had never happened. The main reason is demographics: Americans are much more likely to work between the ages of 25 and 54 than when they are older or younger. But with the baby boomers aging, and many of their children now at least 16 years old but not yet into the prime of their working lives, it is the older and younger ends of the working-age population that are growing most quickly. Adjust for the changing population, and the “missing” workforce shrinks to about 4.3 million.

Moreover, even as young people make up more of the working-age population, they are becoming less likely to work. That is partly the result of rising rates of college attendance and partly of declining rates of employment among high schoolers. Both are long-term trends that were likely accelerated by the recession, as young people went to college in part to avoid the brutal job market, and as employers spurned teenagers for more experienced employees. No doubt many of those teens and 20-somethings would rather be working, but they aren’t sitting idle waiting for the job market to rebound. All but about 350,000 of the missing young people are full-time students.

Lastly, the financial crisis and recession—along with longer-run trends such as improved life expectancy—have led many older Americans to postpone retirement, although a far smaller share of them work than people who are in their prime working ages. That adds about 1.2 million additional older workers to the labor force, offsetting some of the decline among other age groups.

Put it all together, and the labor force is missing about three million workers who aren’t in school or retired. That is still significant: Add those workers to the unemployment rolls and the jobless rate would jump to 9.3%. But it suggests the decline in participation is about more than a weak economy. Ray Stone, an economist at Stone & McCarthy Research Associates in Princeton, N.J., notes that the number of “discouraged” workers—those who quit looking for jobs because they don’t think any are available—has actually been trending down for the past two years.

“The general view is that the labor-force participation rate is falling because loads of unemployed workers are becoming discouraged and dropping out,” Mr. Stone said. “That’s overly simplified.”

Even if workers aren’t all giving up, however, the shrinking labor force is still significant. Many older Americans are retiring with much less in savings than they had planned. Many younger ones are taking on huge debt loads to stay in school. And even as the number of officially discouraged workers has been falling, the ranks of those who are out of work for other reasons, such as raising a family, have been rising. Mr. Stone argues that could be a sign that the jobs that are available don’t pay well enough to cover the cost of child care—a possibility supported by other evidence that many of the jobs created in the recovery have been low-paying or part-time.

Indeed, the focus on the labor force can obscure what’s really missing from the economy: jobs. Nearly four years into the recovery, the U.S. still employs close to three million fewer people than when the recession began in December 2007. Nearly 12 million people remain unemployed, two-fifths of them for more than six months. Those people haven’t dropped out of the workforce, but they’re still a long way from finding work.


A version of this article appeared  on  The Wall Street Journal. 

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