Vanishing workforce weighs on growth

Put out an all-points bulletin: Millions of Americans have gone missing from the workforce.

Every month that those would-be workers are gone raises the odds that they might never come back, dimming the prospects for future economic growth.

The vanishing trend is more than a decade old, but it accelerated during the Great Recession. Throughout 2012, economists held out hope that it had stopped. But then came Friday’s jobs report, and hopes were dashed.

The Labor Department reported that the U.S. labor force — everyone who has a job or is looking for one — shrank by 500,000 people in March. That brought the civilian labor force participation rate to 63.3 percent in March, its lowest level since May 1979. And it left the workforce several million members smaller than the Congressional Budget Office estimates that it should be, given the nation’s demographics.

Perplexingly, the driving force behind the decline does not appear to be baby boomers beginning to retire, an event economists have long predicted would shrink the size of the workforce. It’s people in the prime of their working years, ages 25 to 54, who began tumbling out of the job market in the early 2000s and have continued to disappear during the recovery.

That’s obviously bad for those people, who aren’t earning money in any way that would legally require them to pay taxes. It’s also bad for the economy for a simple reason: The fewer workers, the less growth produced.

A smaller workforce reduces what economists call potential gross domestic product, or how much the economy can be expected to expand over the long term. The decade of declining U.S. workforce participation has taken a toll on that potential growth level, many forecasters say. For example, Michelle Meyer, a senior U.S. economist at Bank of America Merrill Lynch, said her real potential growth projections have fallen from 3.25 percent a year in the mid-2000s to 2.25 percent today — all because of the change in participation levels.

So, where did everybody go? And if hiring picks up, will they come back?

Economists have ideas but not all the answers.

“Prime-aged people are working less, and we don’t know why,” said Betsey Stevenson, a labor economist and associate professor at the University of Michigan. “I get concerned because there are a lot of people who have useful and productive skills that could really contribute to the economy, and we’re just failing to find ways to get them involved.”

The easiest explanation for vanishing prime-aged workers is the weak job market: The economy just isn’t creating enough new jobs to keep job-seekers engaged, so many of them are getting frustrated and abandoning their search for work.

In order to pull people back into the workforce, said Heidi Shierholz, a labor market economist at the liberal Economic Policy Institute, “it’s going to take seriously improving job opportunities, and that hasn’t happened yet.”

Some researchers are making headway in explaining where people go when they leave the workforce. The conservative Heritage Foundation did a study last year that found that most of the people who left between 2007 and 2011 ended up in one of two places: They went to school, or they went on disability. The researchers expect the students to eventually return, but not the workers on disability, said James Sherk, Heritage’s senior policy analyst in labor economics.

Still, some aspects of the vanishing trend remain a mystery. Economists are struggling to explain why a large number of prime-aged African American men aren’t working. After decades of entering the workforce in greater numbers, women reached a saturation point in the past decade, and their participation has declined since then. No one is sure why.

A paper presented at the Brookings Institution last year by Robert Moffitt, a Johns Hopkins University economist, found declining participation to be “disproportionately concentrated among the less educated and younger groups within the male and the female populations and, for women, especially among unmarried women without children.” But the overall decline for women, he wrote, is “more difficult to explain” than that of men.

The hope among many economists is that faster growth and stronger job creation will begin to pull people back into the workforce. In that sense, workforce dropouts would be like an idled army, ready to form up again when the cause demands it. That would be good news for the economy: “We don’t think all of these workers are permanently lost,” said Meyer, the Bank of America economist.

Other economists are not so sure. The fear is that the longer people are out of work, the more their skills will erode. Their social networks will atrophy. Gaps in their résumés will scare off potential employers. They would become essentially unemployable.

Evidence is scant that this scenario has set in. But Friday’s numbers reignited concerns. “The idea that labor force participation is structurally or institutionally impaired gains increasing credence with each passing jobs report,” JPMorgan economists wrote in a research note Friday.

The longer the trend goes, the better the odds that’s true.

Jim Tankersley is the editor of Storyline, where he explains complex public policies and illuminates their human impact.
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