Why Labor Force Participation Is Still so Low
By Allison Schrager
January 19, 2015 - Businessweek
The latest U.S. jobs report, released on Jan. 9, found that
unemployment in the U.S. is nearly back to normal, at 5.6
percent. Still, a more telling statistic, the share of Americans in the
labor force (people working or looking for work), barely budged at
just 62.7 percent. That figure was significantly higher before the
recession, at around 66 percent, but labor force participation started to fall
in 2009 and has since been trending down.
This seems to confirm the worst fears of economists Larry Summers and Brad
DeLong, who in a
2012 paper warned that unemployment could permanently damage the
economy. Without government spending, that paper noted, unemployed people who
couldn't find work would get discouraged, lose their skills, and drop out of the
labor force indefinitely.
New research questions whether that's what has been happening in recent
years. Data from the the Census Bureau's Survey of Income and Program
Participation, as Bloomberg Businessweek reported, shows
that most people who left the labor force during the recession came from
high-income households. That's surprising because skilled people with college
degrees (who tend to have relatively higher incomes) faced much lower rates
of unemployment. So why aren't these people in the labor force today?
According to data from the Current
Population Survey (from the Bureau of Labor Statistics and the Census
Bureau) there are three main reasons the labor force participation rate fell:
retirement, disability, and more people in school—with a discouraged worker
falling into any of those categories.
The primary reason people don't work is retirement, and more people
retired during the recession:
As the chart above indicates, a larger share of the U.S. population is now
retired. That can mean either more discouraged workers (who may retire earlier
than planned) or an older population. But as the second chart shows, the share
of people aged 55 to 64 who retired actually fell from 20 to 16 percent from
2006 to 2014. Rather than dropping out of the labor force because they
couldn't find a job, older Americans kept working. In other
words, the recession seemed to keep more
elderly Americans in labor force, probably because people
couldn't afford to retire when they had originally planned. A growing number of
retirees did contribute to the dwindling labor force, but only because the
American population got older. There isn't much evidence that droves of elderly
workers got frustrated with their job prospects and retired early.
The second-biggest reason people don't work is school. The share
of non-working students increased from 5.8 percent in 2006 to to a
peak of 7.1 percent in 2012; it comprised mostly individuals younger than
35. That figure increased because people went back to school when they couldn't
find work, though it's likely to improve: Members of this group will probably
look for work when the economy improves, and they may even have learned new
skills. In fact, there are already signs that some people who went to school are
returning to the labor force. School enrollment among those aged 20 to 29 is
down from the its 2010
peak. In 2013 the share of non-working students started to fall.
Combined, these trends explain why high-income households account
for most of the shrinking labor force. There are fewer workers because
more young people went to school (their parents' income counts as household
income) and because only people who could afford to retire did so. But retirees
and students can't account for all of the decline: Since the recession, the
number of people not working because of a disability has steadily increased. And
their numbers continue to increase five years into the recovery.
It may be that frustrated workers are using disability as a reason to
drop out of the labor force—especially older people who
couldn't afford early retirement. But there's also been a small
increase in younger disabled workers, those aged from 25 to 54. In 2006, 4.5
percent of them didn't work because of a disability, compared to 5.3 percent in
2014. That trend is particularly worrisome because few
will reenter the labor force.
What does it all mean? The fact that a majority of labor force
opt-outs are students or retirees from high-income households suggests that the
recession wrought less damage to the U.S. workforce than was initially feared.
Those people will either go back to work or would have left the labor force
anyway. Still, the growing number of disabled workers indicates that the
recession did inflict some permanent damage to the American labor force,
and this could take years to repair.