Why are people dropping out of the labor force?

at 10:52 AM ET, 12/02/2011

This month, the unemployment rate fell from 9.0 percent to 8.6 percent partly because, as Sarah Kliff points out below, workers have been dropping out of the labor force. Roughly 315,000 fewer Americans actively sent out resumés and answered job ads than the months before. That made the official unemployment rate look better. But what happens to those Americans who drop out? Where do they go?

There are all sorts of possibilities. Some stay at home, or decide to enroll in school, or focus on raising kids, or simply bide their time until the job market improves. The number of workers who want a job but aren’t counted in the labor force rose by 110,000 last month, and has risen since last November to about 6.1 million people. Curiously, most of the drop in participation last month was among unmarried women, particularly black women (as Dean Baker observes, the shift hasn’t been driven by women in two-earner households deciding to stay at home).

All told, roughly 2.6 million Americans have been actively looking for work in the past year, but aren’t counted in the stats because they weren’t looking in the past four weeks. If those people do start answering ads, the unemployment rate could rise again.

Meanwhile, economists have pointed out that the labor force participation rate has been steadily shrinking over time due to structural changes in the economy. It’s not just the horrible job market that’s discouraging workers. The Congressional Budget Office, for instance, expects the participation rate to keep dropping in the years to come, even after the economy recovers. Why is that? Well, for one, the baby boomers will start retiring en masse soon. But the share of women who chose to work has also fallen to its lowest level in nearly 20 years. And, at the same time, the percentage of young people who are looking for work has dropped by quite a bit.

The CBO offers one explanation for why people under the age of 25 are dropping out of the labor force: “That change appears mostly to reflect a long-term increase in school enrollment (particularly among teens in the summer months) and a declining tendency for students to work while they are enrolled in school.” Some economists have argued that this trend could be a positive development if more young people are getting an education, although the fact that fewer students are working while at school might be one reason why student loan debt is becoming so unmanageable for many.

Meanwhile, Daniel Hartley, a staff economist at the Federal Reserve Bank of Cleveland, recently tried to dig in the numbers a bit further. He notes that the participation rate among older workers — ages 55 and up — has been holding steady since the recession began. That could be because seniors are healthier and feel like working longer, or it could be because their 401(k)s were torched in the financial crisis, forcing those workers to stave off retirement in order to replenish their savings. Hartley also points out that eligibility requirements for disability benefits have been loosened, and about 350,000 new workers were added to the rolls each year between 2007 and 2010. That explains a small fraction of the drop in the participation rate.

So there are a lot of different factors at play here. But that still leaves millions of workers out there who would like a job but have been too discouraged to keep looking or have given up entirely.

 
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