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WonkFeud Finale: Why the labor force participation debate matters

The WonkFeud between our own Jim Tankersley and the Wall Street Journal's Ben Casselman has reached its end; read earlier installments here, here, here and here.

Tankersley sums up the discussion and why all this stuff matters.

Why do we care that workforce participation is falling? In the column that sparked this feud, Ben Casselman gave us two answers. Both have to do with fear: We fear that the labor market is weaker than we think, and we fear that discouraged workers who left the labor force might, with enough time away, never make their way back into jobs.

Casselman tells us that the latter fear "may be exaggerated." He also says, in his latest feud post, that I have outlined no real disagreement with his main points. So here’s a disagreement that's crystal clear: That fear is not exaggerated. It is under-exaggerated.

Instead of thinking about falling participation as “structural” or “cyclical," , as Casselman does. Instead let’s think of it as “inevitable” or “not inevitable.”

The “inevitable” decline in labor force participation is the one America has seen coming for decades – as the great mass of baby boomers begin to retire and mass of new would-be workers coming of age to replace them is smaller. (It also includes the shift in the economy toward more young people pursuing higher education.) If that group were largely responsible for the falling participation, Casselman would be correct. There wouldn’t be much to fear about more weakness in the labor market or the prospect of permanently unemployable people.

But the reality is that right now the “inevitable” group isn’t nearly as big as the “not inevitable” group of people who really would rather be working, if possible.

In a companion post to this feud, economist Heidi Shierholz of the liberal Economic Policy Institute estimates that non-inevitable workforce dropouts represent three-quarters of the decline in participation since the end of the recession. That’s about 4.4 million workers, by her calculations. In a follow-up e-mail, Shierholz draws on historical Labor Department estimates of participation rates given the nation’s demographic trends and calculates that another 3.7 million workers went non-inevitably missing from the labor force in the decade before the recession. That’s 8 million people, if you’re scoring at home.

James Sherk, a policy analyst at the conservative Heritage Foundation, comes to a similar conclusion on a percentage basis. Demographic changes explain about one-fifth of the decline in workforce participation, he calculates. One reason he differs with Casselman is in considering students. Sherk says that part of the participation drop “comes from people in school being unable to find part-time jobs that they would have held down in better times. That is a real decrease in welfare, since it implies higher student debt when they graduate. It also says the part-time/low-skill job market — the types of jobs people typically take to earn money on the side while enrolled full-time — is doing worse than the official unemployment rate suggests.”

Which brings us back to Casselman and the question of what we should really be fearing in this economic environment.

Ben concludes his latest piece by declaring, “All this focus on labor-force participation, whatever its causes and consequences, is a distraction from the far more pressing threat of high joblessness.” No, it’s the opposite. By ignoring the vanishing workforce for the last 10 years or so, policymakers underestimated the weakness of the American economy. Even before the Great Recession hit, the 2000s were on pace to be the most anemic decade for job creation in the history of Labor Department record-keeping -- the absolute worst. You didn’t read much about that at the time because, thanks to declining participation, the unemployment rate stayed low.

My fear is that, by misreading the trends in labor force participation now, policymakers might feel a false sense of security about the state of American job creation. We don’t know why nearly 4 million workers vanished before the recession; why would we assume that the 4 million who left after the recession will eventually return?

In a paper released this month by the Federal Reserve Bank of Boston, economists Christopher J. Erceg and Andrew T. Levin size up the role of demographics and other factors on workforce participation and conclude that non-inevitable dropouts (my phrase, not theirs) are the bulk of the problem. Then they explain what that means for the Fed. “The monetary rules developed for the Great Moderation period may have to be adapted to account for broader measures of slack,” they write.

Translation: Monetary policy might need to be even more aggressive to speed up growth than it already is. Further translation: This debate isn’t a distraction. For a lot of workers – and for future economic growth – it’s a big part of the ballgame.