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Workforce dropouts: Frustrated, retired or lack skills

- The Washington Times - Thursday, September 20, 2012

Nearly every month, the same fight broke out between Democrats and Republicans as updated government data showed the U.S. unemployment rate dropping from more than 9 percent to 8.1 percent over the past year: Democrats pointed to the 4.6 million new private-sector jobs created since 2009, while Republicans contended that the rate was falling in part because millions of frustrated people were simply dropping out of the job market because they were unable to find work.

Both sides had a point, economists say. Jobless rates are down both because some people are finding work and because some people have stopped trying.

The big question: Who are all these people who have given up, driving the share of able-bodied Americans in the labor force to a 30-year low of 63.5 percent last month?

They are primarily young people who don't have much work experience and older people who have decided to retire. But there's also a lot of people in-between who have tried to find jobs and just haven't come up with anything, so they've decided to sit on the sidelines for a while.

The unemployment rate goes down when people stop looking for jobs, retire or go back to school — even if they'd rather have a job — because they no longer meet the Labor Department's official definition of "unemployed." To remain in the jobless category, they must continue actively searching for work, under the long-standing definition.

Despite the political brouhaha over the jobs report each month, the trend toward people working less started well before the Great Recession of 2007-2009 and President Obama's election in 2008. A principal driver of the trend — the retirement of the baby-boom generation — has been anticipated for years. Everyone agrees that the onslaught of boomer retirements, which started in earnest in 2007, is a major part of the reason why fewer people are choosing to work.

Aging society

"We're an aging society. We have more people retiring," and America's young people are less inclined to work between periods of schooling than they did in previous eras, said Federal Reserve Chairman Ben S. Bernanke, providing his reading last week on why people are dropping out of the workforce in growing numbers.

Also contributing to the decline, he noted: the decades-long trend of women joining the workforce peaked around 2000 and is now on the wane. For years, increased female employment had offset and masked the gradual decline in work participation of men, who had long dominated the workforce, but that is no longer so.

While such demographic trends are "baked in the cake" and would be hard to reverse, Mr. Bernanke emphasized that the exit of otherwise ready and able workers is one symptom of the marked weakness in the job market since the recession. It is the reason the central bank is vowing to keep stimulating the economy until it is convinced nearly everyone who wants a job can find one.

Mr. Bernanke describes the lost potential of millions of idled workers as a "grave concern" both because of the personal tragedy as millions of people drift from middle-class comfort into near-poverty and homelessness, and because the economy and society as a whole are damaged when productive citizens are pushed aside, no longer able to contribute to growth. In many cases, they become wards of the state and a burden on those who do work and pay taxes.

People pushed into early retirement by the recession have driven up claims for Social Security and Medicare benefits years ahead of schedule, moving up the projected insolvency of those fastest-growing entitlement programs. And applications for food stamps, Medicaid and other government benefits are running at record levels.

For their part, younger people who have chosen to go back to school are piling up student loans, most of them guaranteed by the government, driving total student debt to an all-time high of more than $1 trillion and eclipsing every other kind of consumer credit.

Tom Porcelli, chief U.S. economist with RBC Capital Markets, said the behavior of the so-called millennial generation has been pivotal. The trend among teens and 20-somethings toward working less and staying in school longer started at least a decade ago, but it exploded during the recession.

As with previous economic downturns, young people find themselves at a tremendous disadvantage in competing for jobs with older, more experienced workers. Many of those who aren't avoiding the job market altogether by staying in school are taking menial, contract and part-time work to make ends meet, or even working as unpaid staff just to get the job experience while moving back in with relatives and friends.

Dropping out in droves

"The younger generation is driving the broad stagnation/contraction in the labor force," said Mr. Porcelli, noting that the share of 20- to 24-year-olds in the workforce fell to 69.7 percent last month — the lowest since 1972 — while the share of 25- to 34-year-old workers, at 81.1 percent, is also near a 40-year low.

The figure for prime working-age millennials, in particular, reveals the stunning weakness of the economy, he said. "That was closer to 84 percent when the recession took hold," he said.

"The improvement in the unemployment rate is offering nothing but a head-fake" because it does not reflect the severe underemployment problem among youth, he said.

While many young people are sitting out the hard times rather than trying their luck in the job market, economists point out that they can't do that forever. At some point they will surge back into the job market, possibly in large numbers that will paradoxically end up driving the unemployment rate higher, at least in the short term.

Given the long-running trends toward retiring earlier and staying in school longer, it is hard to tell how many of the dropouts would have stayed in the market if the recession had never occurred.

A study by the Economic Policy Institute, a labor-funded think tank, makes a stab at estimating that. Taking into account the underlying trends, it concludes that about two-thirds of the missing workers — or nearly 4 million people — are truly discouraged workers who would have stayed in the job market and not dropped out between 2007 and 2011 if jobs had been available.

Millions of missing workers?

By the EPI's estimate, a proper accounting for the missing workers would push the labor force participation rate nearly 2 percentage points higher to 65 percent and produce an equal jump in the unemployment rate to about 10 percent. But the extent of this larger unemployment problem may not be known for some time.

"The job market is slowly healing," said Heidi Shierholz, author of the study, but "it is unlikely the missing workers will enter or re-enter the labor market until job prospects are strong enough that they will not face months of fruitless job searching."

A few economists are skeptical of the theories on large-scale worker dropouts. Ward McCarthy, managing director at Jefferies & Co., finds little use for the department's household survey, which provides information about the number of those leaving the workforce each month. The survey since the recession has fluctuated wildly, sometime showing a half-million people exiting the workforce in one month, and in other months showing nearly as many rejoining the market. Most economists consider the department's monthly survey of businesses more reliable. It has shown steady if unspectacular growth of about 100,000 a month in jobs since 2009.

Among the possible explanations for the large number of dropouts, Mr. McCarthy said, is that many people laid off during the recession have reached the end of their extended unemployment benefits, which are available for about two years in most states. Once they lose those benefits, they are no longer required by federal law to keep looking for work, so many of them simply stop trying at that time and find other things to do, he said.

Benn Steil, a fellow at the Council of Foreign Relations, contends that the Fed and everyone else is wringing their hands for no good reason. He says the current worker-participation rate is consistent with the trend since 2001 of Americans working less. The aberration from the trend, he says, actually occurred in the years just before the recession, when the economy was growing so robustly that it drew workers into the market who otherwise would have decided to retire.

"Today's labor force participation rate is precisely where its post-2001 trend line suggests it should be," he said. "The broader picture is one of a steadily declining [rate] as the population ages."

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