Every time you see news of the unemployment rate dropping, attach a big fat asterisk to what appears to be good news.
You probably don’t need me to tell you that. You or someone you care about may still be out of work. In December, 10.4 million were officially unemployed even as the jobless rate fell to 6.7 percent from 7 percent. Only 74,000 net new jobs were created.
But that asterisk concerns a profound change happening: The number of working-age Americans who have jobs or are actively looking is shrinking.
Called the civilian labor-force-participation rate, it fell to 62.8 percent of the available workforce in December, the lowest in 35 years. The decline has not been arrested by the end of the recession. About 12.6 million are not in the labor force compared with 2007.
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This is the most dramatic change to the rate since women began entering the labor force in large numbers in the late 1960s.
For example, in 1964, the labor-force participation rate was around 58 percent. By 1974, and in spite of a recession, it was above 61 percent. By the late 1990s, the rate was more than 67 percent.
This turning point arguably began in the 2001 recession, but the rate stabilized around 66 percent until the Great Recession. It’s been all downhill since then.
The same dynamic is playing out in Washington and most other states in the Northwest. Our rate was 63.2 percent in December vs. 70 percent in late 1998 and early 1999.
So even fortunate Washington, with world-class aerospace and technology clusters, has been unable to avoid the downdraft of a shrinking workforce.
Also in December, the participation rate was 63.9 percent in Idaho and 61 percent in Oregon. Alaska was an outlier at 67.3 percent.
The reasons behind the change are a source of intense study and some debate among economists. Broadly, they include people retiring or going on disability, those who are staying in college or returning to retrain, and others who have stopped trying to find a job.
Shigeru Fujita at the Philadelphia Fed got some press last November with research that seemed to attribute most of the cause to retiring baby boomers. The earliest members of that huge cohort are now 68.
Thus, the participation rate is declining for the “right reason” rather than the ‘”wrong reason,” which would be an economy still so wounded that it is not producing adequate numbers of jobs.
Actually, Fujita’s argument is more nuanced. While many reasons are behind the drop until 2012, he writes, since then it has been “entirely due to retirement.”
Over at the Atlanta Fed, Ellyn Terry has broken down the different reasons for nonparticipation. Again, retirements make up the largest share of recent dropouts. But she notes a big increase in the numbers who say they want a job.
A subset of the dropouts are the so-called missing workers, about 5.6 million that are not actively seeking employment. Economist Heidi Shierholz of the Economic Policy Institute calculates that more than three-quarters are under age 55. They are likely to come back into the labor force if the economy strengthens.
”In other words, weak labor-force-participation rate remains a key component of the total slack in the labor market.”
Unfortunately, the ratio of job seekers to job openings has remained steady in recent months at almost 3 to 1.
Long-term unemployment — those out of work more than 27 weeks — is at record levels. In Washington, 30.4 percent of the unemployed are in this predicament. Many states are cutting off aid to the long-term unemployed.
The longer a worker is unemployed, the harder it becomes to find a new job. Skills fall behind. Many companies are reluctant to hire someone who has been out of work so long.
And even if boomer retirements comprise the biggest driver of this turning point, it raises fresh questions. For example, how many chose to take early Social Security because the job market was so difficult? Older workers tended to hang onto jobs better than others during the recession, but many that were laid off faced a more challenging time finding new work.
Another question is the quality of ”retirement.” Many of the oldest boomers benefited from pensions and decades of secure employment. Most of the others didn’t and face shortfalls from 401(k) plans (if they have them) and inadequate savings. Many of these boomers are trying to put off retirement to maintain their living standard and build a nest egg.
The other problem with the retirement narrative is that 3 million young people have graduated from high school each year of the Obama administration. That should be enough to replace the retiring boomers and stop the decline in the labor participation rate. But as blogger Bud Meyers points out, that hasn’t been happening. As of 2011, only 27 percent of those graduates were in full-time jobs, according to a Rutgers study.
Remember this when you see the unemployment rate dropping. The evidence shows it is still falling for the wrong reasons.
You may reach Jon Talton at firstname.lastname@example.org