What We Have Here is a Failure to Participate

Last time I discussed why the “low” unemployment rate was no longer a reliable indicator of the labor situation in the U.S. Now, as the latest headlines trumpet, the official unemployment rate is dropping to 5%, wow 5%! What is currently wrong with the job market?

-         Not enough jobs are being created to absorb the number of people who want to work.

-         The jobs being created are not “quality” jobs. The wages and benefits are not equal to many of the jobs destroyed by the Great Recession.

-         There is a large, and growing, structural unemployment problem. The skills of the unemployed and underemployed are not a match for the “quality” jobs that are being created.

-         The labor participation rate fell rapidly as a result of the recession and has continued to decrease. Many people have left the workforce and are not currently seeking employment.

Because the labor participation rate directly impacts the unemployment rate and is the most important factor in this right now, it deserves closer examination. A problem with understanding the labor participation rate is that it has become highly politicized. Conservatives claim that all the people are leaving the workforce due to the horrible economy (or discouraged workers). Liberals claim all the people are leaving the workforce because all the baby boomers are hitting retirement age ( or demographics).

An economist at the recent FTR Freight Conference gave the most objective analysis I have heard. He said calculations show that two-thirds of the labor participation loss was due to demographics and one-third was due to discouraged workers.

The first thing to consider is this: even if only one-third of the increase is discouraged workers, it is still a significant number. At some point in a recovery, workers are supposed to reenter the job market as opportunities increase. This is not happening.

The second thing is: I would contend that the two-thirds due to demographics figure is probably overstated. Within the baby boomers, it is not just age that is a factor. During previous recessions, younger workers were laid off in greater number than older workers. The reasons were: seniority rules for union workers; employers not having to cut that deeply due to a less severe recession; and employers being loyal to workers who had worked many years at their companies.

The Great Recession changed all that. Many more of the older workers lost their jobs this time for the following reasons: the work force had become much more white-collar since the last bad recession, so older workers were not protected by seniority rules; the recession was so severe that many companies cut employees based on salary levels; older, more experienced workers had higher salaries, therefore they were cut in greater numbers; and, finally, the loyalty rules have changed in our culture. For years, businesses lamented the decrease in employee loyalty, and during the Great Recession the corporations stuck back.

After getting downsized, a significant number of older workers lacked skills, opportunities, or the desire to start over in a new job, so they have involuntarily retired, found a way to go on disability, or have just dropped out of the workforce and given up hope. These people get counted as “demographic,” but they are very discouraged and trapped by their circumstances.

Also, factor in the people who are working part-time beyond their retirement age because they are either bored or didn’t save enough for retirement. These people are increasing the participation rate not decreasing it, and doing so in the older age ranges. So what we have here is the 70-year old greeter at Walmart who is just relieving his boredom, offsetting the 60-year old person who needs to work but has given up hope. On paper it looks the same, one person doing one job, but the circumstances and consequences are extremely different.

In addition to these “older worker” and “demographic” factors, here are some other reasons for the lower labor participation rate:

This guy would like greater participation!

-         The Affordable Care Act enables more people to receive health insurance without having a job. This provides a disincentive to work that did not exist before.

-         The expansion of the safety net (food stamps, etc.) during the recession also provides a disincentive to work for some people.

-         There is a cultural change taking place reducing the traditional “work ethic” which was stronger in previous generations.

-         Skilled manual labor is not desired or valued by people or society as in times past. For example, trailer manufactures have had problems finding people who wanted to work in factory jobs the past two years.

-         The “quality” of jobs created in this recovery has been poor compared to the quality of the jobs destroyed in the Great Recession. There may not be sufficient motivation for someone who was displaced from a $50,000 white collar job or $40,000 blue collar job to take a retail or service position that pays half as much.

-         The significant “structural unemployment,” unemployed people not having the skills necessary to fill the job openings. This happens at the far ends of the age ranges. Older workers cast out from their long time jobs may lack the technical skills needed for new jobs. Younger workers have amassed huge college loan debt and do not have the skills (or desire) for the skilled manufacturing jobs that are available.

Add this all up, and you have a tremendously dysfunctional employment situation. The labor participation rate is alarmingly low. Economic growth is stuck on “low,” due to the lingering effects of the recession (both psychological and monetary) and government policies that restrict growth, not promote it. When explored in total context, is it any wonder the unemployment rate does not accurately describe the current situation?