LABOR | Low Participation II (Job-Finding and Disability)

Chart 1. BLS Data on Labor Force Participation Rates
(FRED chart, St. Louis Federal Reserve Bank).

I am continuing to think about the low U.S. civilian labor-force participation rate, encouraged by Marcus Roberts and the other busy demographers at MercatorNet in Auckland, New Zealand.

If the stubbornly low employment-population ratio (and the still-declining labor-force-participation rate shown in Chart 1) are explained by demographic shifts in work-family choices - such as men and women taking more time off from working as a lifestyle decision - then government policies may not require change. We might just have to accept that we will have fewer people working.

However, I just read a summary of a Working Paper (#20183) by Robert E. Hall, "Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis." It appears in the National Bureau of Economic Research (NBER) October Digest. Hall suggests two interesting explanations for the continuing low labor-force-participation rates, as of 2013, beyond the six mostly demographic ones that I suggested.

1. "Job-finding rates" are low. When recessions or job interruptions are short, workers can go back to what they were doing before. But when a high level of unemployment has occurred over a long period, some jobs are being destroyed completely in the interim. Workers who have been laid off can't shift over to another employer. Many examples of clerical jobs displaced by computers come to mind, such travel agents handling low-cost travel who are being displaced by increasingly user-friendly internet reservation systems.

Chart 2. Applications for Disability Aid and Acceptances,
1999-2013.

2. Disability (SSI) and food stamp program beneficiaries are growing rapidly. The number of  receiving SSI (disability) and food stamp assistance has, says Hall, been increasing persistently. The high implicit taxes on earnings that result from losing benefits means that this group of people has very little incentive to participate in the labor force.

Comment

The number of applications for disability assistance has certainly been increasing, at least through 2010 (see Chart 2). But the percentage of applications that are being rejected is increasing as well. More than half of applications were accepted in 1999 whereas in 2013 the acceptance rate was down to one-third. The number of applications that are being accepted has been declining since 2010.

The NBER Digest summary doesn't provide policy recommendations, but the demographic, job-finding and disability theories have some interesting implications.

• To the extent that the continued low labor-force participation rate (despite lower unemployment) reflects personal lifestyle choices or the changing composition of the American work force, government action may not be very useful. 
• But if the job-finding problem is driving low labor-force participation, it might be useful for the Department of Labor to educate displaced workers to the changing needs of the workplace and get across the fact that experience in a skill that is no longer called for isn't going to count for much in a new job.
• For displaced workers to get back into the work force it may require working hard to stay relevant, especially in tech-related jobs. 
• Returning to the work force may also require a lowering of income expectations and a conscious effort to be tolerant of "diversity", which means in part more co-workers looking and behaving in ways that were not usual five or ten years ago. 
• The job-finding problem might be partly addressed through entrepreneurship training, although entrepreneurs typically won't show up on payroll-jobs data (which are generated from filings for state unemployment-insurance programs) until they start paying themselves. At the same time, they also probably won't show up in the household surveys as unemployed or looking for work. Entrepreneurs may or may not appear in the labor force.
• The theory that disability payments make it unattractive to work raises the question of the direction of causality. One reason that disability enrollments are rising could be that those who are unemployed and are discouraged by the lack of good jobs turn to disability programs when their unemployment compensation expires. So one reason for the larger number of disabled is the high unemployment rate. 
• This causality would also help explain the higher rejection rates - the long-term unemployed are casting around for a replacement for their expiring unemployment checks and disability might look like a solution. 
• We should have enough data on earnings of disabled people to assess whether it would make sense to reduce the earnings penalty, i.e., the loss of benefits tied to levels of earned income.

Thank you for reading. Please comment - john (at) cityeconomist (dot) com.

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.