JOBS | Low Labor Participation Puzzle - I (Demography)

Chart 1. September's unemployment rate
(red) fell to 5.9%, but the employment-
population rate is still in the doldrums.

Economists are famously good at predicting next month's numbers based on previous months, but they are not so good at identifying in a timely way big, important things like the oil crisis in the 1970s or the huge, interminable impact of the financial crisis of 2008.

MercatorNet in New Zealand, whose slogan is "Demography Is Destiny", is devoted to looking at long-term trends affecting the people living on planet earth.

The Good Jobs News for September

They picked up on my post on last Friday's September job numbers.  My main question was why the New York Times coverage the next day asserted that the favorable job numbers would not help Democrats running for office.

Chart 2. The employment-population ratio looks
weak under Obama, but the sharp occurred
under Bush 43. In the 1950s and 1960s, it was
 two percentage points lower than the Carter low.

Surely, I thought, it was good news that the United States was finally breaking through the 6 percent unemployment number (see the red line in Chart 1, which does not reflect the breakthrough September data). At one time in history that number meant it was time for the Fed to start worrying about an accelerating rate of inflation.

However, if someone is looking for bad news, they point to the stuck employment-population ratio, which fell unusually fast and far after the financial meltdown.  See how the blue line in both Charts 1 and 2 drops during and after the last recession (Chart 2 is older but shows the presidential administrations).

Given their focus on long-term demographic trends, MercatorNet is interested in what the job numbers in the United States suggest about changes in American working habits and perhaps working habits worldwide.

Europe has historically had fewer people working relative to the population, which could reflect (1) higher preference for leisure, (2) fewer jobs available, (3) fewer women working, (4) earlier retirement, (5) more attractive and longer-term unemployment benefits. However, Europe's labor-force participation and employment-population ratios have recently been rising faster than the U.S. numbers.

The Employment-Population Decline Puzzle

So we have a puzzle here. Does the low U.S. employment-population rate reflect a slowdown or even a turnaround in the increase in women in the labor force that accounts for the shift in the employment-population ratio since the 1960s? Are retirements of baby boomers accelerating? Are young people taking longer to find jobs? Did the financial meltdown of 2008 cause such a loss of faith in American government and Wall Street that many people lost their taste for the money game? Or is it possible we are seeing major shifts in some other U.S. worker attitude or preference?

Labor Force Participation Rate

For 40 years it seemed that the increasing participation of women in the workforce would continue forever. The labor force participation rate rose from 25 percent in 1950 to 70 percent in 1990 for married women, growing slowly after 1990. It grew from 70 percent for single women to 80 percent in 1990.  During this period, the participation of men in the workforce was decreasing.

"In the middle of one night / Miss
Clavel turned on her light/ And
said: "Something is not right."

During the last few years, however, more European women have been entering the workforce, while women have been dropping out in the United States and men have continued dropping out in Europe and the United States.

Data on labor force participation rates among different age cohorts can help answer a couple of the questions relating to age. In this century, people have been working longer - the labor force participation rate of those 55 and older rose by nearly 8 percentage points as of 2012. So retirees have not been dropping out. However, the participation of adults under 55 has fallen from 80 percent at the turn of the century to about 75 percent. To quote Miss Clavel in Madeline: "Something is not right."

Possible Stories

Here are six possible explanations of the low employment-to-population ratio:

1. Some married men are dropping out of the labor force, or reducing their hours, to allow their successful wives to devote themselves entirely to the stresses of the workplace.
2. Some working women are rethinking their priorities and are taking more time at home.
3. Baby boomers not tethered to the workplace because of the financial setbacks from the 2008 financial crisis are leaving so that they can start small businesses, which would take them off payrolls until their business starts paying salaries. (Or they are just deciding to retire–greater longevity means the proportion of adults who are retirees will get bigger as time goes on.)
4. The competitive workplace is getting harder to enter and compete in, extending the time that young people spend in career-oriented studying.
5. As the workplace becomes more demanding, people who were accumulating wealth for its own sake are deciding they want to work fewer hours.
6. The Affordable Care Act means that some people who were uninsured no longer have to set aside as much of their income for health care, for themselves or their families.

These kinds of explanations will be studied in the coming weeks and months, because finding the best explanations will lead to better policies. Meanwhile, the U.S. employment-to-population ratio and its cousin the labor force participation rate will, I think, be closely watched...

See follow-on posts on Job-Finding and Disability and on Nonemployment.