The Incredible Shrinking Labor Force

The number of people the Bureau of Labor Statistics counts as "in the labor force" is dwindling in the United States. Brad Plumer lays out the basics in The Incredible Shrinking Labor Force.

If the same percentage of adults were in the workforce today as when Barack Obama took office, the unemployment rate would be 11.1 percent. If the percentage was where it was when George W. Bush took office, the unemployment rate would be 13.1 percent...

The participation rate is defined as those working or looking for work divided by the total eligible working population, including those not counted in the labor force. The current rate is 63.6%, which is the same as it was in December, 1981.

That helps explain a seeming contradiction in the unemployment numbers — the rate keeps dropping even though job creation has been soft...

The percentage of Americans in the labor force has been declining for more than a decade. In January 2000, 67.3 percent of Americans had a job or were actively seeking work. By 2007, just before the recession, that had fallen to 66 percent. In January 2009, the month Obama assumed the presidency, it was 65.7 percent. Since then, it has fallen to 63.6 percent, a level not seen since the first year of the Reagan administration.

The implications for returning to what economists call “full employment” are significant. According to calculations by Michael Greenstone of the Hamilton Project, if the labor force grows by 90,000 a month, then an economy creating 200,000 jobs a month would take about eight years to return to full employment. If the labor force grows by 125,000 a month — plausible if discouraged workers begin returning to the labor force — it will take almost 14 years to return to full employment.

I have been investigating this labor force question lately. It is almost impossible to get a 100% accurate picture of what's going on, but there are three different factors at work here.

1. Discouraged and marginally attached workers — if you're not actively looking for work, you're not counted in the work force
2. Demographics — retiring Baby Boomers
3. A surge in those receiving Social Security Disability Insurance (SSDI)

Let's look briefly at these three factors, keeping in mind that it is very hard to guage their importance in terms of actual percentages. For example, the Chicago Fed concluded that 50% of the shrinking labor force is due to boomers retiring. But if you read Plumer's article, you will see that estimate vary. Whatever the reality is, the bottom line is that a shrinking labor force is not good news for the United States.

Discouraged And Marginally Attached Workers

Cynics and critics (including me) have ridiculed the BLS for lowering the unemployment rate while shrinking those counted in the labor force. That ridicule is well-deserved, but not counting discouraged workers is not the whole story. Still, let there be no doubt that the potential workers who have given up is much higher than it was in the "normal" (bubbly) times since 1995.

In How Many Discouraged Workers? Timothy Taylor reports the official BLS data and gives us the relevant definitions.

The good folks at the U.S. Bureau of Labor Statistics divide the adult population into three groups: the employed, the unemployed, and those out of the labor force. When an employed person stops working, if they are looking for work, they are counted as unemployed; if they aren't looking for work, they are counted as out of the labor force...

So how many discouraged workers are there? Actually, the same survey that is used to count the unemployed can also be used to count "discouraged workers." In fact, BLS counts "discouraged" workers as one of two parts of an overall group of people who are Marginally attached to the labor force.

Within the overall category of "marginally attached," the first subcategory of "discouraged" workers "includes those who did not actively look for work in the prior 4 weeks for reasons such as thinks no work available, could not find work, lacks schooling or training, employer thinks too young or old, and other types of discrimination." The other subcategory of "other persons marginally attached to the labor force ... includes those who did not actively look for work in the prior 4 weeks for such reasons as school or family responsibilities, ill health, and transportation problems, as well as a number for whom reason for non-participation was not determined."

The top (blue) line shows the marginally attached. The bottom (red) line shows those who are discouraged. From Taylor: There were 865,000 "discouraged" workers in March 2012, and 2,352,000 in the total "marginally attached" category. Thus, if one wanted a broader picture of the labor market including both those officially classified as unemployed along with the discouraged, the total number of people in these two categories would have been would have been about 7% higher than official unemployment alone, at 13,565,000. If one wanted a broader picture of the labor market including both the unemployed and all of the "marginally attached," the total would have been 18% higher than official unemployment alone, at 15,052,000.

OK, let's move on.

Retiring Baby Boomers

The first graph above shows that the participation rate increased steadily from the mid-1960s due to women entering the work force. That trend ended after the 2001 recession. A closer look at the graph shows that the labor force declined right after that downturn, then leveled out until the bigger "Great" recession which started in late 2007. Economists are fond of pointing out that much of the decline over the last decade was due to baby boomers retiring. There's no doubt that the U.S. population is aging. My source for the graphs below is a First Trust research note Explaining The Drop In Labor Force Partipation.

The U.S. population is aging.

In so far as labor force participation rates are lower among the elderly, an aging population points to the importance of demographics in explaining why the participation rate is falling. This next graph is very interesting.

If we compare 2011 with 1995, we see that labor force particpation has increased among all groups 50 years or older. Participation has dropped the most among the youngest Americans (16-24) and is slightly lower for all groups in-between (25-49).

There is no way to look at this second graph and see good news. As I've often discussed, America's youth have been disenfranchised just as older Americans try to keep working because their retirement funds were largely destroyed over the last 5 years or they didn't have any retirement savings to begin with. Interested readers should read my post Desperation, Not Recovery, In Jobs Growth. I quoted John Hussman, who dug into the BLS data. What he found was astonishing.

If you dig into the payroll data, the picture that emerges is breathtaking. Since the recession "ended" in June 2009, total non-farm payrolls in the U.S. have grown by 2.32 million jobs (establishment survey, or 2.03 million using Household survey figures).

However, if we look at workers 55 years of age and over, we find that employment in that group has increased by 3.04 million jobs.

In contrast, employment among workers under age 55 has actually contracted by nearly one million jobs, regardless of which survey you use. Even over the past year, the vast majority of job creation has been in the 55-and-over group, while employment has been sluggish for all other workers, and has already turned down.

This is an unmitigated disaster.

Collecting Social Security Disability

Just when I thought this picture couldn't be messier, it got messier when I saw Mish's post on the surge in those collecting disability insurance. He quoted the Bloomberg story Disabled Americans Shrink Size of U.S. Labor Force.

Michael White says he wishes he still could pluck the bass line to Hank Williams Jr.’s “Born to Boogie” and pay bills with money he earns himself. High unemployment -- along with ailments that he says render his fingers inoperative and make him cough up blood -- have dashed his hopes.

White is among the 1.6 million Americans who’ve claimed Social Security Disability Insurance, or SSDI, since the 18- month recession began in 2007. When the slump reduced demand for tow-truck drivers, the 60-year-old Fort Myers, Florida, resident, who has also worked as a musician, lost the job he’d held for five years and started collecting unemployment benefits.

The number of workers receiving SSDI jumped 22 percent to 8.7 million in April from 7.1 million in December 2007, Social Security data show. That helps explain as much as one quarter of the decline in the U.S. labor force participation rate during the period, according to economists at JPMorgan Chase & Co. and Morgan Stanley.

The participation rate — the share of working-age people holding a job or seeking one -- was 63.8% in March after falling to a three-decade low of 63.7 percent in January.

[My note: the participation rate fell to 63.6% in April.]

Disability recipients may account for as much as 0.5 percentage point of the more than 2 point drop since the end of 2007, the economists calculate, and that contribution could grow when some extended unemployment benefits expire at the end of this year.

“How we measure and understand what’s going on in the economy can be influenced by the degree to which various public- support programs are available and being used,” said Michael Feroli, chief U.S. economist at JPMorgan in New York. “With a rising number of disability beneficiaries, there are both lower unemployment rates and lower participation rates.”

It's hard to say what's going on here, but Mish sees fraud in this numbers. I'm sure there is some of that, and clearly some older workers have taken the early disability route to taking care of themselves. Let's finish up.

As I said earlier, there is no good news in the decline of the participation rate, regardless of the specific causes. The young have been abandoned, many of the aging Boomers are hanging on for dear life, and those in the middle find themselves trying to support a larger and larger population of non-working Americans through government intermediaries. The revenue trend for the governments looks horrible, even if a miracle occurs and Congress rescinds the Bush tax cuts for the rich. If these trends continue, and there's no reason to expect they won't, this story does not have a happy ending.

It is easy to see why I've concluded that those who think there will be surge of growth in the American economy in the coming decade are living in Dreamland.

Comments

[Ben]

There isn't a solution to this.

[John Andersen]

That's right, there is no solution. There are only intelligent ways of coping and adjusting. Those include going car-lite or car-free, growing more of our food, repairing things, building resilient local neighborhoods, forming food co-ops, replacing electronic entertainment with homemade entertainment, etc.

[william sorlien]

Absolutely there is fraud in the SSDI numbers. I regularly am in contact with a "marginalized" demographic; i.e., people on the dole. I've seen entire apartment complexes here in St. Paul full of recipients. Interesting to note, many reveal collecting a variety of benefits in multiple states. Extrapolate those numbers, and the result is astounding.

[Anywhere But Here Is Better]

The human propensity to apply sly tactics when confronted by difficulty is evidenced here.

There's always an attack on people claiming disability benefits "unfairly" when times are tough, as if these people are the cause of the tough times. This "fraud" is no worse than the obvious fraud being perpetrated by the government in massaging the unemployment figures for political purposes, and the very real fraud being carried out daily by the banking and investment community. This latter fraud is the root cause of the current slump in job availability. Banks are not backing job-creating small businesses with sufficient lending, but only shuffling their decks on the stock and currency markets in the pursuit of hyper personal bonuses, which is funny money par excellence.

We humans are cheats, however you look at it. Those at the top of the pile cheat to stay on top, and the rest of us cheat any way we can to survive. It's the law of the jungle (survival of the fittest --- yawn) and nothing will change our nature at the present time.

We can continue to complain, but the only hope is some evolutionary jump that brings us into more sapient conduct, as opposed to grab-all-you-can-for-yourself mindlessness that is par for the course in 2012.

[sharonsj]

So, William, if you have evidence of fraud, why aren't you turning in those people?

Using cases of fraud to demonize the people who really need help is a typical Republican tack. Meanwhile, the folks I know who get Social Security and Disability really need it.

[John D]

One group missing I believe from the data is all the recent unemployeed high school and college graduates. I don't believe they can be counted as 'looking for work' until they've lost a job, collected unemployment, and reported with list of employers they've contacted to the unemployment agency.

[Ben]

@ John Andersen

I don't think there is going to be much coping going on.