Special Report 6, April 2015
Is the Decline in the
Labor Force Participation Rate During This
Recession Permanent?
by June Zaccone, Assoc. Prof.
of Economics (Emerita), Hofstra University and
NJFAC Executive Committee.
Whenever a recession leads to dropouts from the
measured labor force, as those who despair of finding work give
up looking, commentators begin asking whether the decline in the
labor force participation rate [LFPR] is permanent, and arguing
that it is. They also explain that the problem is structural--that
jobs are available, but workers are not suited to them by skill
or training.
This recession has been accompanied by a sharp reduction in the LFPR. David Leonhardt says, "If the decline stemmed largely
from an aging work force, it would be much less worrisome. But
the initial wave of baby-boomer retirements plays only
a small role in the drop; the labor force participation rate
has fallen almost as sharply for people aged 25 to 54 as it has
for the overall adult population." [1]
Source: Federal Reserve, St. Louis; data to 3/15
Reduced participation is the counterpart of fewer prime-age workers being hired. Note the experience of those 25-54, shown in the blue line. They have been displaced by hiring of those over 55--the grey line.
The Economic Policy Institute calls the "drop in employment for 'prime-age' workers during [the] 2007 recession truly stunning." [See below.] EPI recently estimated that in September 2014, 6.3 million people were missing from the labor force. They used the ingenious method of using BLS projections of the LFPR for made before the financial crisis to find the difference between the potential labor force and the currently measured one.
Employment-to-population ratio of workers ages 25–54, 1977–2/2015
There is no evidence of a structural problem, one
that would show itself in rising wages for those jobs going begging.
Or, that the job vacancy rate shows a surfeit of jobs compared
to the number unemployed. In fact, the latest data [7/14] show
that there are nearly 5 job-seekers for
each available job. [Job-seekers here include those working
part-time involuntarily along with those not counted in the labor
force but who want a job, in addition to those counted as officially unemployed.]
It is telling that the LFPR was roughly constant
in the 1990's, a period of rapid job expansion and decline in
unemployment. In fact, the yearly LFPR reached its postwar maximum,
67.1, in the three years of relatively rapid job expansion 1998-2000.
Even before the painfully slow job expansion since the financial
crisis, job creation of the Bush Administration from 2001 to 2007
was slowest of the postwar era-- only
0.7%/year to the end of 2007.
LFPR age 16
and over [to 4/15] Federal Reserve
Dean Baker comments on the decline: "Some seem to view this
drop [in the LFPR] as a reflection of a change in people's willingness
to work. While this is possible, it is highly unusual for large
numbers of people to suddenly change their attitudes towards work.
(Most don't have this luxury.) The fact that this change in behavior
coincides with a period in which many people can't find jobs leads
us demand-side types to think the
problem is that people don't see jobs out there. .... So,
we can believe that the dropouts from the labor force indicate
a change in willingness to work, or we can believe that this is
simply the normal cyclical pattern that we always see with labor
force participation rates following employment growth."
Researchers at
the Federal Reserve have found that "cyclical factors
account for the bulk of the post-2007 decline in the U.S. labor
force participation rate," and can fully account for that
of prime-age adults. Other researchers support this: "The largest declines have occurred in states with the largest job losses."
During this recession, the lfpr for black men fell to its lowest recorded level [earliest data 1/72]: it fell to 62.1. It has since risen to 65.0 [April 2015], but still represents a calamitous lack of opportunity to work for a major segment of our work force.
Let's wait for job recovery before deciding that the LFPR
has permanently declined. Authors of a Federal Reserve study agree, and predict that"the decline in labor force participation since 2008 is likely more transitory than permanent."
WHAT HAS HAPPENED TO THOSE NO LONGER LOOKING
FOR WORK?
DISABILITY For some older workers
facing poor prospects of re-employment, especially those who have
done arduous jobs, putting in a claim for disability payments
makes sense. According to the Social Security Administration,
Incidence
rates tend to increase temporarily in bad economic times.
Some individuals who could readily qualify for DI benefits based
on the severity of their medically-determinable impairment may
be able to work at a level in excess of substantial gainful
activity (SGA) given the opportunity and needed assistance.
But with elevated unemployment rates like those seen over the
last several years, many of these individuals will lose employment
and will seek DI benefits.
RETIREMENT Another reaction to continuing
high unemployment is that some people retire earlier than they
otherwise would. Social Security and, for some, other retirement
benefits are preferable to no income once unemployment insurance
has lapsed.
PENURY What happens to some
dropouts is that they are forced into
dependency or worse.
GETTING TO WORK One problem many
of the unemployed must cope with is a lack of affordable means
to get to work.[2] "Nearly 40 million working-age people now
live in parts of major American metropolitan areas that lack public
transportation, according to an analysis
by the Brookings Institution's Metropolitan Policy Program." "Between 2000 and 2012, the number of jobs within the typical commute distance for residents in a major metro area fell by 7 percent." And buying a car on the income from many jobs is not possible. “Over
the last six months, of the net job creation, 97 percent of that
is part-time work.” Then, of course,
there is the pay lag. The average real hourly earnings of production and non-supervisory workers in the private sector peaked at $9.26 [1982-4 prices] in 1972-3, not reached again since. Using the same base years, the average pay of these workers was $8.74 in December, 2012. Needless to say, car prices have not remained at the 1972 level.
YOUTH AND ITS LABOR PARTICIPATION:
The sharp deterioration of the LFPR of young people dates from
the recession of the early 2000's and of course suffered further
declines with the Great Recession. The
BLS reports that the fraction of young people 16-24 employed
[employment to population ratio] during summer 2013, a period when youth employment peaks, was 50.7 percent [7/13]
[not seasonally adjusted]. Their LFPR was 60.5 percent in July
2013, unchanged from a year earlier, but 17.0 percentage points
below its peak of 77.5 percent in 1989. And apparently the decline does not reflect an increase in college-enrollment. "There has been no recession-induced increase in college or university enrollment for either men or women."
LABOR
FORCE PARTICIPATION AGE 16-24, 1960-3/2015
Their low employment rates reflects the high unemployment
rate of those 16 to 19, that is, 23.7% in July 2013.
Though students may be in the labor force, they are less
likely to be than non-students of that age.
LABOR FORCE PARTICIPATION AGE 16-19, 1960-9/2014
[1]
Leonhardt,"‘The Great Shift’: Americans Not Working," Economix, NY Times, August 28, 2013 Graph http://www.economicpopulist.org/content/unemployment-report-shows-labor-force-drop-outs-record-high-5728
[2] "You
won't be expected to commute across the state to find a new job,
but you must be able to get to a job that's reasonably nearby
if one is offered. If you don't have a car, can't get to work
by public transportation, and can't come up with alternative arrangements
to get to a job (such as a car pool), you may be deemed 'unavailable'
to work." and thus a state might deny unemployment benefits.
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