Last Friday, the Bureau of Labor Statistics reported 175,000 net new jobs created in May. The unemployment rate, however, ticked up to 7.6 percent on the strength of a 420,000 worker increase in the labor force, following a 210,000 increase in April. The return of workers to the labor force is encouraging. But though the labor force participation rate ticked up to 63.4 percent last month, it’s still lower than it has been since the 1970’s.
Understanding how many workers we can expect to return to the workforce is incredibly important. Though fiscal policy, controlled by Congress, has lately been completely divorced from the employment situation, the Federal Reserve’s monetary policy is explicitly determined based on labor market conditions. To figure out when there has been enough improvement in the labor market for the Fed to take its foot off the gas pedal, we must determine the ‘new normal’ size of the labor force.
That’s not an easy task. Some workers, including retirees and those pushed out of the workforce by pre-recession trends like the manufacturing decline, are unlikely to return with an improving economy. It will take new and innovative public policy solutions – beyond just a stronger economy – to bring some of these workers back. Others, who stopped looking for work because of the weak economy, can and should come back as the economy strengthens and more jobs become available. If recent workforce dropouts fall mainly into the latter category, a low unemployment rate won’t mean the labor market is healthy again, unless it is paired with a higher labor force participation rate.
Interest in the reasons for – and consequences of – falling labor force participation is high amongst economic commentators. Last month, The Washington Post’s Jim Tankersley and The Wall Street Journal’s Ben Casselman battled in a self-styled “WonkFeud” over the real meaning of the decline in labor force participation. Conservative analysts like AEI’s Jim Pethokoukis routinely re-calculate the unemployment rate by adding in all of the workers that would be in the labor force if participation rates had not dropped.
But economists still don’t know the full story behind the historic changes we are seeing in labor force participation. In a new report “Where have they gone, and can we get them back?” we explain what the latest economics research does reveal about the labor force participation puzzle, and in a series of accompanying charts we lay out the depth and scope of the problem. Key points from the report include:
Fewer workers will mean less growth: The economic impact of leaving so many workers permanently on the sideline will likely be severe, if it is not reversed. One Bank of America Merrill Lynch economic forecaster has lowered her economic growth projections by a full percentage point from the mid-2000’s to today, because of lower labor force participation. Fed Chairman Ben Bernanke has repeatedly raised the point that long-term unemployment “may ultimately reduce the productive capacity of our economy.”
Only about half of workforce dropouts since 2007 appear to be traditional retirees: The number of workers who aren’t in the labor force increased by almost 10 million from 2007 to 2012. Of those workers, almost 5 million are over 55 and report that they don’t want a job. There are nearly 2 million more workers who have stopped looking for work but still want jobs, with more than 700,000 of these workers between 25-54 years old.
Labor force participation began falling even before the recession: Broadly, falling participation before the recession was concentrated amongst the less educated – and evidence suggests that the drop could have been much larger, if not for a housing boom that increased demand for low-skilled workers. Without a similar boom in the current recovery, it may be difficult to bring low-skilled Americans back into the workforce.