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Does Lower Labor Force Participation Mean the 5% US Unemployment Rate Is a Phony Number?
The current 5 percent unemployment rate is half its worst level of the Great Recession. But the jobless rate would be 10.1 percent if the labor force participation rate — which feeds into the unemployment rate — were back at pre-recession levels. So what is the “real” unemployment rate? The other day, I quoted a new Goldman Sachs study on the LFPR issue:
What about the 3.6pp decline in the labor force participation rate since 2007? While it’s true that the unemployment rate would be much higher if participation had remained stable, we now believe most of the decline since that time should be considered structural. By far the largest contribution to the decline in participation has been an increase in retirees—mostly a natural consequence of the aging of the workforce. Rising disability rates—a trend mostly driven by demographics—and a tendency for young people to remain in school have also played a role.The remaining cyclical component is a relatively modest share of the labor force, and broadly captured by the U6 unemployment rate, in our view.
And n0w the San Francisco Fed offers a similar perspective:
First is the aging of the population. The baby boomers are entering retirement and people are living longer. Remember, the participation rate counts everyone over 16, so my happily retired parents count as “out of the labor force,” even though, in their 80s, few people would still be working. Second is that younger people aren’t working as much as they used to. But this is partly because many have extended their education or gone back to school, and fewer are working when they’re there. Third is an increase in people deciding they’d rather have single-income families (Bureau of Labor Statistics 2007–2014). For whatever reason, they’ve traded a second paycheck for spending more time at home, whether it’s for child care, leisure, or simply that it’s a better lifestyle fit. Each of these groups is made up of people who are not working, but doing so for personal or demographic reasons. As their numbers swell, it will, obviously, push the participation rate down.
As for the area of concern, we’re emerging from the deepest, longest recession since the Great Depression. And it’s true that a lot of people did give up looking for work. A key indicator is the somewhat unfairly named “prime-age males” cohort, who are 25–54. This group has historically been a constant in the American workforce, but in the wake of the recession, its participation fell sharply. However, as the labor market has improved, that number has largely stabilized over the past two years, as has the overall participation rate.
The last factor to consider is whether there are people who will reenter the labor force and pull the participation rate back up. The “marginally attached” for instance, a group made up of people who are ready and able to work and who’ve searched for jobs in the past year but who aren’t currently looking. The assumption would reasonably be that this group is poised to return to the labor force. First off, these numbers have come down a lot, falling by over 12% in the past year alone. In addition, my staff has found that, over the past few years, their reentry rate back into the labor force has actually fallen. When you combine this with the aging workforce, it looks unlikely that participation will rise. This is supported by other research from both within and outside the Fed System (Stephanie Aaronson et al. 2014 and Krueger 2015). Overall, the evidence suggests that, even with a quite strong economy, we won’t see a significant number of people come back into the fold.
I italicized the bit about the prime-age workforce — and included the above chart — since that factors out the aging issue. The decline has generated, if not controversy, then at least some puzzlement. As Barclays has put it: “The uniquely American decline in the participation by working-age men and women puts the US in a long-standing contrast to Japan, Germany, and the UK, and is hard to explain on cyclical grounds, because it predated the 2008-09 recession to which, anyway, the other countries were also exposed. … And it leaves the US with a 2014 participation rate that is quite low by international comparison.”
Lots of theories. Some economists suggest nearly a third of that relative decline is due to the absence of “family-friendly policies” such as paid parental leave. This is especially a key reason, according to the Washington Center for Equitable Growth, “for the decline in the overall labor force participation rate and the stalling out of women’s labor force participation.”
And what about prime-age men? My AEI colleague Michael Strain:
Having said that, it is a safe bet that one reason fewer men are working is that real wages for male workers without a college degree have been stagnant or falling for decades. So my second policy suggestion is to expand the Earned Income Tax Credit (EITC) for childless workers, many of whom are low-income men. The EITC is a federal earnings subsidy: if you work, and if you earn less than a certain amount, then the government will supplement your earnings with a transfer payment. The EITC offers very little support for childless workers, with a maximum credit of only about five-hundred dollars. This amount should be significantly expanded, as both President Obama and Rep. Paul Ryan have suggested. Previous expansions of the EITC have lifted millions out of poverty, and are designed to incentivize nonparticipants to return to the workforce. When they do, everyone wins — the economy has more workers and can produce more goods and services, and the new participants can earn their own success in the labor market, leading flourishing lives that include the dignity only work can provide. The Washington Center for Equity.
My point here is that even given the demographic headwind, better policy might well improve the share of Americans working or willing to work.
Published in Economics
Perhaps $18 trillion of unchallenged dept, or is it $180 trillion, provides such a wealth cushion that all the detailed analysis is overwhelmed by that one item.
Let the good times roll.
It worked for the Weimar Republic.
Theory: We don’t want the public spooked anymore than they are. Therefore, despite the numbers looking like an international outlier, it’s our story and we’re sticking to it.
As I understand the rate takes in people from 16 to 65. Is this wrong and if so where is that information.
“Rising disability rates—a trend mostly driven by demographics”
Mostly, yes – but when you listen to the demographers and bureaucrats talk about it, they admit (quietly) that there’s a lot of “disabled” people whose disability is “ran out of unemployment.”
In a lot of large cities, you can find lawyers who specialize in getting disability compensation for people who have nothing physical wrong with them – and the local bureaucrats are fine with that, because it keeps the worst scammers off the streets.
So many words to describe and analyze a simple phenomenon; you cook the books and torture the data, and the unemployment number is meaningless. I’m betting that there are many like me who retired early due to the crapulent economy and are now off the books.
The economy never recovered from the Democrat attack on the home mortgage business that caused the panic of 08. Gee, who knew that funny money can cause problems, and that giving money to fiscal poor performers is expensive?
So the EITC incentivizes people to stay in low-paying jobs? That seems like great policy.
How about this: If your income is low, get a second job. Like I did, for 3 years, working 13 out of every 14 days, between the ages of 40-43, while going to school part time for a Master’s degree so I could earn a higher income in future employment.
How about that for an incentive? Let’s call it the “Get Off Your Can And Work” incentive program. Won’t cost taxpayers a dime in transfer payments and increases individual income.
In view of the graph that was reproduced, this sentence earns a coveted “gilding the lily” prize for economics. So we have a “stabilized” group of discouraged workers, and have had this group for about two years even as the labor market has gotten better. Perhaps the participation rate for this group has dropped so dramatically that we finally have wrung every last person (more or less) who’s given up looking for work out of the system. That would certainly “stabilize” the rate.
This is wrong. The base for the labor force participation rate is the civilian, noninstitutional population 16 and over.
The civilian noninstitutional population (from the Current Population Survey) includes persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.
So there is no upper age limit, but by taking out active-duty military, those in institutions, and those under age 16, you get pretty much anyone who is available for work.
The rate for men age 75 and over was 11% in 2014.
Hard to believe that “family friendly” policies, or lack thereof, has a meaningful impact on the US ranking seems to me that these policies have been in place for a long time so we indeed had a much higher participating rate in the very recent past wth those exact same policies. The decline is real and attempts to minimize it strike me as nothing but hand waving.
The other thing that gets missed here though is even if there are meaningful structural factors at play, someone still has to produce the “stuff” those people consume. Fewer people producing “stuff” generally means less “stuff” is produced barring monumental productivity gains (clearly not happening at the moment) or China continuing to send us “stuff” and getting pieces of paper in return.