Calculating the reasons, cyclical or structural, that the labor-force participation rate has plunged
makes a big difference when considering what job policies to adopt.
The Bureau of Labor Statistics will as usual release its monthly report Friday on how many jobs were gained in April and on the official rate of unemployment. It's not likely to be an especially encouraging announcement. The best that can be said at this point is that it probably won't be as gloomy as
the report for March. But you can never be sure.
One of the first places beneath the headlines that many analysts—professionals and amateurs alike—will look to get a better handle on the report is the labor-force participation rate. That rate has taken a nose-dive over the past five-and-a-half years, down from 66.0 percent to 63.3 percent, the lowest since May 1979. There's a dispute over the status of who makes up the millions represented by that 2.7 percent drop. And thus a dispute over how serious it is and what should or can be done about it.
First, a definition: The labor-force participation rate measures the percentage of working-age adults who either have a full- or part-time job or are actively looking for one. Since the 1950s—when women started entering the labor force in large numbers and by the mid-'90s doubled the percentage who had been working in 1948—the participation rate had been steadily rising, interrupted only by recessions. As people were laid off during those economic downturns, the LFPR naturally fell as jobs became scarcer but then recovered as the economy improved.
At least it was that way until the recession of 2001 witnessed a change in this decades-old pattern. The LPFR fell and then began recovering as usual. But by the time the 2007 recession began, it was still a full percentage point short of its 2000 peak of 67.3 percent. And now it's four points below that peak.
This plunge has produced a vast cohort of "missing workers."
"Missing," as in people who would be in the labor force if they thought they had a chance of getting a job. But they don't think they have a chance, so they've dropped out and aren't counted as unemployed. They aren't really missing, of course. They have instead been statistically disappeared. Out of sight, out of the headlines, off the minds of policymakers who, these days, would rather muck around with deficit-driven budgeting instead of stimulating the economy to get these millions of Americans earning a paycheck again.
The financial and psychological battering of these once-were and would-be-again workers is obviously huge. But the statistical effect is also big. If they were still in the labor force, being counted by the BLS each month, the unemployment rate would be higher—perhaps nine-plus percent—and the sluggish economy would look even unhealthier than it already does. Which might, if Congress weren't populated by so many corrupt puppets and wimps, actually spur some fixes. (Yes, I'm a dreamer.)
But while most politicians conveniently ignore the troubles caused the extended drop in the labor force, there is, as noted above, a dispute among economic analysts about the overall composition of the workers who have left.
Please read more about missing workers below the fold.
Heidi Shierholz
That dispute wound up this week as a
"wonkfeud" between Jim Tankersley at the
Washington Post and
Ben Casselman at
The Wall Street Journal. Heidi Shierholz at the Economic Policy Institute later weighed in with her own astute analysis, pointing to a
new 40-page study [pdf] I've been reading by Christopher Erceg and Andrew T. Levin, with the scintillating title of "Labor Force Participation and Monetary Policy in the Wake of the Great Recession." The latter two are on leave from Federal Reserve Board as visitors in the research department at the International Monetary Fund.
The key question is over how much of the participation-rate drop is cyclical (due to the fact there aren't nearly enough jobs to go around) and how much is structural (a matter of demographics, mostly baby boomer retirements). How much weight an analyst gives to cyclical vs. structural effects makes a big difference in what corrective policies, if any, he or she thinks should be adopted. If the bulk of the drop in the participation rate is because of natural attrition due to retirements, there's little need for more stimulus since those folks would have retired even if no recession had occurred. These former workers aren't missing.
However, no analyst argues that the participation rate drop is all structural or all cyclical. Thus, Casselman counts about three million "missing workers" since the Great Recession began. Tankersley agrees but says the problem is that the recovery from the 2001 recession wasn't that robust and there were already missing workers when the 2007 recession began. As Shierholz so aptly puts it, 2007 was "no labor market paradise by any stretch."
However, she doesn't buy their three million count for the past five years. Based on a November 2007 BLS report that projected the labor-force participation rate through 2016, Shierholz puts the number of "missing workers" from the start of recession nearly 50 percent higher:
The [BLS] projection assumed a healthy labor market over that period, so all of the labor force changes it forecasts reflect purely non-cyclical factors. The difference between these projections and the actual labor force participation rate is thus a very good measure of the cyclical change in the labor force participation rate, i.e. the change in the labor force participation rate that is a direct result of the weak labor market in the Great Recession and its aftermath. [...]
I find that there are roughly 4.4 million missing workers, which means that around 75 percent of the decline in the labor force participation rate since the start of the Great Recession is due to cyclical factors. (This is slightly larger than the two-thirds estimate I calculated here. It is also somewhat larger than what is implied by the Congressional Budget Office’s estimates of the potential labor force, which suggests that around 60 percent of the decline is due to cyclical factors.)
Other studies give credence to Shierholz's take on how much of the labor-force participation rate drop is structural, that is, demographic. For instance, in the Chicago Federal Reserve Bank's "Explaining the Decline in the U.S. Labor Force Participation Rate (2012," the LFPR drop from demographic causes was estimated at one-fourth of the total.
Putting 4.4 million missing workers back to work would be a hard enough task. Based on the average monthly seasonally adjusted job gains of the past six months, it would take until May 2015, seven-and-a-half years since the Great Recession began. But as Shierholz has elsewhere pointed out, the real jobs deficit, because of population growth over the past five years, is twice that, 8.8 million.
But that's not the whole story. To get back to where we were in 2007, the monthly addition to the population of around 95,000-100,000 working-age people must also be absorbed. At the current rate of job gains, filling the whole gap would take until April 2019. That would be 11 years and five months since the Great Recession began. For the record, the longest time between the end of one post-World War II recession and the beginning of the next was 10 years.