Unexpectedly weak job growth was not the most troubling part of the August jobs report. Nor was the drop in wages, painful as it is. The most daunting aspect, as Veronique pointed out, is the continued drop in labor-force participation.
Even as the population grew by more than 200,000, the number of Americans working or looking for work fell by 368,000. The 0.2 percentage point drop in labor force participation is the only reason the unemployment rate fell (also by 0.2 points) — those not looking for work don’t count as unemployed.
Since the recession began, labor force participation has fallen by 2.5 percentage points. Today only 63.5 percent of adult Americans are participating in the labor market, the lowest number since September 1981 — a time when far fewer women worked outside the home. If labor-force participation had remained at pre-recession levels, about 5 million more Americans would either have jobs or be looking for them.
In a recent Heritage Foundation study I analyzed the drop in labor force participation. It is not entirely the economy’s fault. Retiring Baby Boomers will cause labor force participation to fall no matter what the economy does.
The table below shows how the labor force has changed from 2007 to 2011. It also shows how the labor market would have changed if demographics hadn’t changed. Demographic factors, like the aging Baby Boomers, explain about one-fifth of the drop in labor-force participation. The rest of the fall results from the weak economy. (Click to enlarge the table.)
Those leaving the labor market are usually either in school or on disability-insurance rolls. Both reflect the economy’s weakness. Many students who would like to find part-time jobs cannot, and have given up looking — they no longer get counted in the labor force. High-school and college enrollment among 16–24 year olds has also risen by 1.2 million. The poor economy has reduced their opportunity cost of going to school; they now give up less potential income to study.
The proportion of Americans collecting disability benefits has also risen. Almost 6 percent of U.S. adults now report being disabled and outside the labor force — 1.5 million more non-workers than if disability rates had stayed constant.
Health care has improved over the past generation, so why the increase? Many workers who apply for disability benefits are not entirely disabled. They have medical conditions that qualify them for benefits, but under other circumstances they could work at some type of job. Given the option of receiving benefits, however, they take them. Very few of these new disability claimants will ever return to the labor force.
The unemployment rate is terrible. But the number of people dropping out of the labor force shows the economy is even worse than it appears.