April 11, 2014
The unemployment rate has fallen quickly to 6.7%. But suddenly Janet Yellen tells us that rate is out and we should now focus on the “participation rate”. What is the participation rate? What has been happening to it? Should we do anything about it?
There are 247 million people in the United States over the age of 16. Of that number 156 million are ready, willing, and able to work. They comprise what is known as the “labor force”. If you divide the latter by the former and express it as a percentage you have just calculated the “participation rate”. It simply measures the percent of people in our country that would like a job. It is currently 63.2%.
The numbers above also tell us that there are 91 million people who are not in the labor force and are not seeking employment. Who are these people?
Some of them are older folks. In fact, 36 million or 40% of those people not in the labor force are over the age of 65.
That means that there are 55 million Americans of working age who are not part of the labor force. But many in that group choose to not be in the labor force. Many are full time caregivers. Their spouse works and they decide to stay at home and take care of the kids. A few are wealthy individuals who choose to live off their investments. We should not worry about these people.
Others are less fortunate. When the recession hit millions of workers lost their jobs. Typically after about six months they become “discouraged” and simply give up looking. Perhaps they are too old or do not have the technological skills required in today’s job market. Once they give up looking for a job they are no longer part of the labor force. Others decide that unemployment or disability benefits are so attractive that they, too, give up looking for a job and drop out of the labor force.
What has been happening to the participation rate? The participation rate rose steadily from about 60% in the early 1970’s to 66.5% in the early 1990’s in large part because the baby boomers reached working age. At the same time more and more women chose to work. The participation rate was then steady for the next 15 years before falling sharply during the recession.
Because of the timing many economists are quick to blame the decline in the participation rate on the recession. They highlight the difficulties of getting a job and focus on how many people have been out of a job for more than six months. Some people have become discouraged and dropped out of the labor force. That is not good.
But something else is going on. Remember the baby boomers? When they entered the labor force in the 1970’s and 1980’s the participation rate rose sharply. Those same baby boomers are now beginning to retire. When they do they will leave the labor force and the participation rate will decline. That should happen between 2011 and 2029. Some studies have estimated that 50% of the recent decline in the participation rate is attributable to this phenomenon. It merely reflects an aging population and is not something we should worry about.
There are things we could do to entice people back into the labor force by eliminating disincentives to work.
For example, offer less generous unemployment benefits. Why work when you can earn almost as much sitting at home?
As benefits have improved fewer disabled workers continue to work. One might consider tax advantages for employers to retrain disabled workers so that they can remain on the job.
Older workers between 62-65 years of age still pay the Social Security payroll tax but will not receive additional benefits. Eliminate this disincentive to work by exempting them from the payroll tax.
Obamacare health insurance subsidies for lower income workers disappear quickly. Why work if the reduced health insurance subsidy and higher taxes are going to eliminate the additional income?
These changes could increase the participation rate but in an election year they are not likely to happen.
In our opinion the discussion today should focus less on the participation rate and more on how many people in the labor force actually have a job. The official unemployment rate currently stands at 6.7%.
But if you are one of the 0.7 million “discouraged workers” who have given up looking for a job entirely, or you are one of the 1.5 million people who have not looked for a job in the past six months but have looked within the past year, or you are one of the 7.4 million people who are working part time but would like full time employment, you are not part of the official rate but are included in the broadest measure of unemployment which currently stands at 12.7%. Prior to the recession it was 8.0%. This is a better barometer of the labor market.
As we go forward employers will increasingly turn to our youth where the unemployment rate is still high. They will offer some part time workers full time positions. They may entice older workers back into the job market. By this time next year the broad unemployment rate should decline to 11.0% — still high but the lowest rate in six years.
In short, some of the drop in the participation rate is simply the result of retiring baby boomers and not something we should worry about. If we eliminated disincentives to work we could increase the participation rate but in an election year that is going to happen. We should focus instead on the broad unemployment rate and how many people in the labor force actually have a job. That rate is still high but falling quickly and our sense is that it will not be long before we start hearing about shortages of available workers. We already hear about it in the construction industry and in technology. More sectors will follow.
Stephen Slifer
NumberNomics
Charleston, SC
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