- The Washington Times - Thursday, November 11, 2004

When a major U.S. economic statistic departs from its normal historical behavior, particularly when it signals bad news, we need to take heed.

The statistic in question is the labor force participation rate — the percentage of the working-age population employed or looking for a job. It has declined four years in a row, from 67.1 percent in 2000 to 65.9 percent last month. This translates to a loss of 2.8 million workers.

The four-year drop in labor force participation is the longest and the sharpest since World War II. We need to ask why and consider the implications for workers and the economy.

Labor force participation in the postwar years has been rising, mainly among women, with interruptions during times of economic weakness. The atypical decline of the past four years was among most labor force groups — men and women 20 to 54 years old and teenagers. An exception: People 55 and older, whose participation rate increased.

The recent falloff in overall participation is not explained by changes in demographic composition. We must look elsewhere.

Labor force participation is cyclically sensitive, rising and falling with the job market, though usually with a lag. When employment opportunities worsen, some people without jobs drop out of or postpone entering the work force until prospects improve. That’s what happened this time, during and following the 2001 recession.

In part, the extended decline in labor force participation since 2000 can be explained by the unusual nature of the economic recovery since the last recession. The recession began in March 2001 and ended that November. But the early post-recession period was one of uncertainty and subdued economic growth, and the recovery in the job market was severely delayed.

Payroll jobs continued declining for nearly two years after the recession trough, longer than in any economic recovery in the postwar period. Jobs finally began rising in September 2003. But except for a few good months this year, the job growth was modest and not strong enough to attract prospective workers waiting on the sidelines — the hidden unemployed — back into the labor force.

Also, it takes time for nonparticipants to recognize an upward shift in the job market and become confident it will continue.

Job search is not costless. In the five previous postwar economic recoveries, the delay between payroll job recovery and the return of discouraged workers to the work force varied from 6 to 27 months, averaging 15 months.

The job market improved this year, showing a spurt of strength last spring and in the last few months. But it has yet to exhibit sustained growth — an extended period of 200,000-plus job gains per month necessary to reverse the four-year decline in labor force participation.

But even with strong and sustained job growth, it’s not clear the participation rate in the years ahead will return to pre-recession levels. There are other longer-term forces depressing labor force growth — i.e., increasing structural hidden unemployment.

There is a growing gap between available skills and those required by our fast-changing high-tech, knowledge-based economy. It not only restrains low-end wages but locks many of the lesser skilled and educated workers out of the job market.

The situation is worsened by the many illegal immigrants competing for low-skilled jobs. Though many American citizens affected return to school or seek retraining, our educational system should emphasize more subjects such as math, science, and computers. More intense global competition also is taking a toll on American workers, despite the potential net benefits to the economy.

Some labor-force activity is not measured in the underground or shadow economy where employment is off the books and payment under the table. But it’s difficult to measure the extent to which recent labor force participation data have been affected by shadow work.

Depressed labor force participation means lost output, lost wages and hardship. Most of the current decline in worker participation is cyclical. If in the coming months and quarters the present robust job expansion continues and appears convincing, we should see substantially greater worker participation next year. But if there are not enough jobs created to return the backlog of hidden unemployed to legitimate work and labor force participation declines again, it will mean another dismal record in our postwar economic history.

Alfred Tella is former Georgetown University research professor of economics.

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