October 1, 2015
By Andrew Soergel
There are more job openings available in America today than at any point since the Bureau of Labor Statistics first started tracking vacancy data back in December 2000. Yet the percentage of adult Americans working or actively looking for a job stands at 62.6 percent, the lowest level in nearly four decades.
America’s labor force participation storm has been brewing for years and reflects changing demographics as well as the results of policies that may have yielded unintended results.
In a nutshell, the baby boomers have aged and are now finally retiring en masse. After bulging into the workplace in the 1970s, women are no longer the force in the labor market they once were. Younger people are opting to educate themselves rather than work. And a less-than-friendly tone toward immigrants is shrinking the supply for some high-skilled jobs.
All told, it’s likely to be a drag on the U.S. economy for years to come.
The U.S. economy has created 11.5 million new jobs during the last 57 consecutive months of domestic labor force expansion. And there were nearly 5.4 million open jobs at the end of May – more than twice as many vacancies as there were six years ago.
And yet Americans are actually trickling out of work at an alarming rate. The country’s labor force participation rate – which measures the share of Americans at least 16 years old who are either employed or actively looking for work – dipped last month to a 38-year low, clocking in at an underwhelming 62.6 percent.
Unemployed individuals who haven’t actively looked for a job in the last four weeks, for any number of reasons, actually slip away from the Labor Department’s unemployment calculations. So although the unemployment rate ticked down to a seven-year low of 5.3 percent in June, that number didn’t do justice to the 640,000 individuals who exited the labor market last month and the nearly 94 million people who were neither employed nor looking for work.
Righting the participation ship is far from an easy battle for a couple of reasons, the first of which is that labor force participation is a tricky concept. It’s a little counter-intuitive, since the economy can add tens of thousands of jobs each month, yet the size of the overall labor market – and the population’s overall participation rate – can shrink, which is what happened in June.
It’s also tough to wrestle with because there are a lot of numbers at play. The monthly participation numbers fell further and faster during and in the aftermath of the Great Recession than they did at any other point in U.S. history. Labor force participation was as high as 66 percent when the recession began in December 2007.
“How do you attribute this drop in the participation rate? You want to say right off the top of your head, ‘The participation rate started dropping sharply right at the beginning of the recession.’ So that would make you think that it’s mostly the weak economy,” says Dan North, chief economist at Euler Hermes.
But participation had peaked years prior – hovering at 67.3 percent in the first four months of 2000 before beginning a gradual descent. The labor market managed to temporarily plug the leak in 2005 and 2006, but the country’s participation rate had been in decline long before the U.S. economy hit a rough patch.
“The decline in labor force participation is not, in fact, a new phenomenon. It looks like this has been a long, slow trend since about the year 2000. But it’s a trend that sped up around 2008-2009,” Justin Wolfers, an economist and professor at the University of Michigan and a senior fellow at the Peterson Institute for International Economics, said of the results of a Brookings Institution participation rate study in a September Brookings video. “That might draw you towards thinking that it’s all about the Great Recession, but there’s something else that happened that year. The very first baby boomers started turning 62, which is a prime age for retirement.”
Some have argued that the Great Recession forced millions of would-be retirees to continue working later into life. This is undoubtedly true, considering the labor force participation rate among individuals at least 55 years old continued climbing through the Great Recession until October 2012, when it leveled off at 40.7 percent. That’s the highest percentage of older Americans participating in the labor force since July 1961.
It was common for boomers to postpone retirement during and immediately following the downturn, but they have gradually begun leaving the domestic labor market. About half of 63-year-old boomers were no longer in the workforce in 2014, according to a recent Gallup study. By the age of 68, less than a third of boomers were still in the labor market.
It’s also important to note that the percentage of older workers participating in the labor market started climbing in the mid-1990s, well before the Dot Com bubble crashed and the Great Recession walloped Americans’ nest eggs. The narrative that older workers are still reluctant to retire solely because of the Great Recession just isn’t as applicable as it was a few years ago.
“What that means is the low levels of participation we see today are not primarily due to the economic cycle. They’re due to a much longer lasting demographic influence,” Wolfers said. “It’s actually something that’s going to continue over the next decade.”
Baby boomers – made up of the large subset of Americans born between 1946 and 1964 – dominated the domestic labor market for years. But now that they’re leaving the workforce en masse, their exodus has dragged (and will continue to drag) on the country’s overall participation rate.
“Baby boomers in a big lump are leaving the labor force. And that explains about half of the drop in the labor force participation rate between 2007 and the end of 2014,” says Andrew Chamberlain, chief economist at Glassdoor. “The second factor is education – people getting more education and staying in school longer. If you get an MBA, you’re out of the labor force for three years. If you get a Ph.D., you’re out of the labor force for 5 years, maybe 7 years.”
The number of individuals enrolled in post-secondary degree-granting institutions, which includes both undergraduate and post-baccalaureate programs, ballooned more than 52 percent between 1990 and 2014, according to the National Center for Education Statistics. With more Americans staying in school longer, the domestic labor force is operating with a constricted supply.
“A third factor is growing disability insurance claims,” Chamberlain says of Social Security disability insurance applications that more than doubled between 2000 and their 2010 peak of more than 2.9 million. “There was a big upsurge in workers shifting over to disability insurance during the last recession. It’s slowed recently. But once you get on disability insurance, you could be out of the labor force for years, because it replaces a pretty significant chunk of your old pay.”
Disability insurance awards have moved hand-in-hand with the unemployment rate in the last few decades, as those who are out of work are more predisposed to seek some sort of governmental assistance. TheCenter for American Progress also attributes the recent rise in claims to America’s aging population, noting that “a workforce with a greater share of workers in their 50s and early 60s will include many more workers with severe disabilities.”
More alarmingly, the participation rate of so-called prime age workers (those between 25 and 54 years old) has slipped in recent years. This is an age bracket that has mostly completed educational requirements and isn’t yet retiring, so prime age down-ticks are difficult to explain.
“We knew that the baby boomers were reaching retirement years and they were going to start leaving,” Harry Holzer, an economist and professor at Georgetown University, said on PBS NewsHour last week. “What’s been more surprising is that even people, say, below the age of 55, what we call prime-age workers, have also been leaving the labor force. And we don’t see any signs that in great numbers they’re coming back. And that’s a big problem. That’s a problem for them in terms of their own earning capacity, but also for the country as well.”
North says there are a couple of factors at play here, including a drop off in women’s labor force participation rate – a demographic that was previously responsible for rapid participation gains in the 1960s and 1970s. Only 56.7 percent of American women were active participants in the labor market in June, down from a 60.3-percent peak in April 2000.
“It is a dramatic change that’s hard to overstate the importance of. In recent years, the labor force participation rate between men and women have begun converging, though they are dropping,” says Chamberlain. “I’m not sure that there’s a great explanation for why we see great gender differences, other than the fact that women are getting more education than men today, which sort of works in the other direction.”
But women’s participation in the labor market, comparatively, is in much better shape than is men’s. Though men’s rate sat at 69 percent in June, well above women’s 56.7 percent, that number is the lowest male participation rate the country has seen since the data was first tracked back in 1948. Men’s labor force participation peaked at 87.4 percent in October 1949 and has gradually gone downhill over the last 66 years.
To further muddy the employment water, the U.S. in May had a record level of job openings, according to a report released Tuesday by the Labor Department. About 5.4 million positions were vacant across the U.S., but hiring remained relatively subdued.
“Well how can that be – lots of job openings but having people unemployed at the same time? It’s because people offering those jobs are looking for skills A, B, C, and the potential employees are coming in with skills X, Y, Z,” North says. “Companies have jobs to fill, but they can’t find the right people with the right skills to fill them.”
North says this helps explain part of the participation rate woes among America’s prime-age workers. Individuals who were laid off during the Great Recession and were out of work for a few months, or even years, fall behind on their job skills and have a harder time getting a job, he says.
“Those people become unemployable for two reasons. One is they lose their job skills and the technology around them has changed so much that they need new job skills and can’t get them,” he says. “And the second part of it is it’s a real impediment to employment when you submit your resume and your cover letter to a hiring manager and it shows you’ve been basically out of work for the last three years.”
Economists generally expect the labor force participation rate to continue its gradual down-tick as more and more boomers retire and more young adults delay entering the workforce in favor of undergraduate and postgraduate studies. These trends inherently are causing the U.S. to fall short of its output potential, which is why many economists consider labor force participation to be a measure of slack in the domestic labor market.
“In the long-term, the labor force participation rate affects what fraction of Americans are doing productive work, and that affects growth prospects in the long term,” Chamberlain says. “And economic growth ultimately determines our standard of living, which influences health, education, arts, and all the other things that we like.”
“If we don’t have enough people working compared to the population, we’re sort of condemned to 2 to 2.5 percent growth,” North says. “So then the next question is, ‘How do you fix that?'”
North says one way to plug the skills gap is to encourage more legal immigration of skilled workers who can fill vacancies once older workers retire. This wouldn’t necessarily turn labor force participation around for American citizens right away (at least not until the immigrants-in-question were nationalized), but it would help maintain domestic output.
“We’re not talking about illegal immigrants or the big political immigration question. I’m talking about an economic issue to stimulate our economy by legal means,” North says. “We need people who have the skills that will fill that skills mismatch as well. We need to encourage those people to come to this country.”
The government’s H1-B visa program is currently capped at 65,000 people, which effectively limits how many skilled immigrants enter the country each year (though there are some exceptions related to education). North says an alteration of this program would allow more legal immigrants to enter the country and fill the skilled positions hiring managers are desperate to fill.
“The way I think about it is we have a million foreign students in this country, a large portion of which are studying STEM. And the day they graduate, we kick them out of this country and say, ‘Go back to China, India, wherever and compete against us with the education we just sold you.’ That’s a crazy system,” he says. “Last year we created something like 200,000 jobs a month, so to let only [65,000] in a year … it would make so much sense to bring in skilled, legal immigrants.”
The bottom line, though, is that these small improvements would only provide marginal changes to the participation rate. Its decline has been a long-time coming – even if it only recently became a hot-button issue – and it is likely to be a long turn before it shoots upward again.