Powell on labor force trends

Today's WP summarizes FRB chair Jerome Powell's analysis of why the labor force participation rate of prime age adults has (1) declined over the last 60 years and (2) become lower than the rate in most other well-to-do nations.  This is an important issue for the prospects for continued economic growth.    With the unemployment rate at all time lows and job vacancies exceeding the number of job seekers, future gains in GDP are contingent on more people entering the labor force.

In the 1960s, virtually all men between the ages of 25 and 54 worked or were looking for work.  Today that rate has gone down to 89 percent.  Labor force participation hinges on the rewards for working versus the value of not working.  One might argue that the rewards for not working have risen, leading to more labor force dropouts.  But single men do not qualify for many income maintenance programs and the inflation-adjusted payout from these programs has declined over the last 40 years.  Also, income maintenance programs are far more generous in Western Europe than the US.

Powell points to two trends that have driven more men to drop out of the labor force: education and opioids.  Today's jobs require more skills than those one or two generations ago, but education levels have not kept up.  Research on the impact of  opioids is just getting geared up.  To date it shows a correlation between low (high) labor force participation with high (low) opioid use across communities.  This begs the question of which came first.

To this list I would add two more items: a declining marriage rate and video games.  Married men are more economically active and make higher wages than unmarried men, although again establishing cause and effect here is challenging as women are less likely to marry men who are unlikely to contribute to a household's economic well-being.  As for video games, research shows they provide a low cost mechanism for passing time with some social interaction that increases the payoff for not working.  

Will those who left the labor force ever come back?

Everyone who has been looking at labor markets over the last five years has been asking, "What is going to happen to labor force participation (LFPR)?"  We know unemployment is down to near normal levels, but LFPR remains at its lowest point in almost 40 years.  The question is important because it cuts to the heart of the issue of whether we are at or near full employment.  The unemployment numbers say yes; the LFPR numbers say no.  So what are the odds that those who have left the labor force will actually return?

Today a WSJ blog reported one relevant item of evidence, based on a sector of the economy that I have researched heavily in the past -- the construction industry.  We all know what happened to construction in 2007-08; it tanked.  That means there are a lot of former construction industry workers out there who have the skills to return.

But are they coming back?  So far the evidence is that they have found other things to do and that this has put construction contractors in a bidding war for scarce talent.  Employment is still well below 2007 levels, yet builders are having a hard time finding qualified help.  This would imply that we should take the unemployment numbers more seriously as an indicator of aggregate labor market conditions.

Understanding the drop in the labor force

Just ran across two items from Marginal Revolution dealing with the drop in the labor force participation rate.  Stanford econ prof Robert Hall has taken a careful look at personal and household factors and has found that most of the drop has taken place among teens and young adults.  More intriguing is the finding that the drop is greater among households in the upper half of the income distribution than the lower half, casting doubt on the theory that more generous income maintenance programs (food stamps and unemployment insurance would be the most likely culprits) are driving the shrinkage of the labor force.

A recent article in BloombergBusinessweek reaches a simular conclusion.  Young people in high income households are staying in school longer and more of them are not working.  The article also notes the growing share of the labor force claiming disability benefits; these individuals are unlikely to return to work even if the unemployment rate dips below 5 percent.

No country for young men

WSJ ran a nice analytical piece about the jobless recovery yesterday.  Even though GDP continues to recover, the job market lags far behind.  The 7.6% unemployment understates the true degree of joblessness because it ignores the drop in labor force participation.  In the 1990s and 2000s, two-thirds of working age adults were in the labor force, meaning they were either working or looking for work.  Last month only 63.4% were in the labor force, a three point drop since the recession started.  Further, the labor force participation rate has kept dropping even as the unemployment rate improved. 

Labor force participation is dropping off for two reasons: (1) the first wave of baby boomers has hit retirement age and (2) a sharp drop in participation among workers under 25.  Part of the latter drop reflects increased school attendance, but a big chunk is due to lousy job market opportunities. 

A few more interesting details:

• The layoff rate has returned to normal levels but the new hire rate is still well below what we have seen in earlier recoveries
• We still have over 4m workers who have been unemployed 6 months or more and those workers have only a 10% chance of getting work in any given month
• There are still 2.4m fewer jobs now than at the start of the Great Recession

Consequences of a shrinking labor force

WSJ's David Wessel devoted his column last week to why the labor force is shrinking and what this means for the recovery.  The labor force participation rate for men has been trending downward for some time, as a result of youth staying in school longer (and being less likely to take part-time jobs) and older men retiring earlier.  The rate for women had been steadily climbing from 1950 to 2000, but has since leveled off.  It has taken a big drop since the Great Recession.

The big question is what will happen once the unemployment rate starts coming down significantly.  Will workers return to the labor force once opportunities improve?  If so, then we must accept the likelihood that the current 8.1 percent number vastly understates the true degree of excess supply in the labor market.  On the other hand, what if the labor force participation rate does not recover?  In this case the upside of any recovery will be compromised by labor shortages and tax revenues will be permanently reduced, exacerbating government budget deficits even more.