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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

The Causes of Declining Labor Force Participation



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While many observers have lamented declining labor force participation as a sign of a weak economy, Scott Winship reminds us that “decline in the size of the labor force does not necessarily indicate a weak economy”:

One reason that labor force participation has declined—and would have declined at least somewhat absent a recession—is that the population is aging. The retirement of the baby boomer generation would produce declining labor force participation even in a strong economy. Barclays analysts last year estimated that nearly 40 percent of the decline in labor force participation between the end of 2007 and the end of 2011 was explained by reduced participation among workers older than 54 who indicated to the Bureau of Labor Statistics that they did not want to work.

In addition, school enrollment has been rising among 18- to 24-year-olds for a couple of decades now. Figures from the National Center for Education Statistics show that among 22- to 24-year-olds, for instance, school enrollment in October increased from 16 percent in 1980 to 21 percent in 1990, then to 25 percent in 2000 and to 29 percent in 2010. Since the trend began before the recession, rising enrollment does not simply reflect younger people fleeing the weakened labor market.

The monthly household employment survey asks people who say they did not work or look for work the previous four weeks whether they wanted a job. Among those who did want to work, some have mitigating circumstances that prevented them from being available for work the previous four weeks (such as family responsibilities). Some have not looked for work in over a year, for various reasons. Others looked for work sometime in the previous year but stopped for reasons having nothing to do with the job market. For assessing the strength of the recovery, the most relevant subset of people outside the labor force who want to work is the group known as “discouraged workers”. Discouraged workers have looked for work in the past year but did not look for work in the previous four weeks specifically because of their negative impression of the labor market.

And as Scott goes on to demonstrate, discouraged workers represent a small and shrinking share of adults outside the labor force. Factoring in the increase in the number of adults receiving federal disability payments doesn’t change the picture very much either:

Clearly, the rise in in discouraged workers and workers receiving disability payments did affect the trend in the unemployment rate. Had there been no change in the share of discouraged workers or in the share of disabled between 2007 and 2011, I estimate that the unemployment rate would have risen from 4.6 percent of the labor force to 9.7 percent instead of rising to 8.9 percent. However, their combined impact did not reverse the decline in unemployment that occurred after 2009. Unemployment (averaged across months) first declined from 2010 to 2011, dropping from 9.6 to 8.9 percent. Had discouraged workers and the disabled stayed at their 2010 shares, unemployment would have fallen by the same amount. Discouraged workers ceased affecting the unemployment trend three years ago, while receipt of disability benefits appears to have peaked in 2010 or early 2011. The decline in unemployment since 2010 has not been overstated by the official rates.

The U.S. labor market is extremely weak. But it is getting better, albeit it at a painfully slow pace. 



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