mainly because long-term discouraged workers quit the labor force – a
persistent problem tied to the Great Recession.
WASHINGTON — The U.S. unemployment rate fell significantly in
December, but the big reason for the shift isn’t necessarily a
comforting one for the economy.
The jobless rate dropped to 6.7 percent of the work force, the lowest
level since October 2008.
But the shift came only partly because unemployed people were finding
work. Rather, the main driver of the change was people who exited the
labor force by ceasing to look for work.
And this wasn’t a one-month anomaly. Rather, the trend of people
opting out of the labor force has become a post-recession norm.
“To me, the most troubling jobs data is not the unemployment number
but rather the disheartening decline in the percentage of Americans
working or seeking a job,” economist Jerry Jasinowski, a former
president of the National Association of Manufacturers, wrote in
November. “In 2007, that number stood at 66 percent. Today it is 62.8
percent, the lowest since 1978.”
Since then, the problem has persisted. The so-called “participation
rate,” the share of working-age people who have a job or want one,
edged up in November and then back down in December as the labor force
shrank by 347,000.
That shrinkage was central to the decline in the unemployment rate,
because people are only counted as jobless if they are participating
in the labor force by actively seeking work.
Initial news coverage of the December jobs figures from the Labor
Department focused on a different mystery: why job creation by the
nation’s employers came in at a lower-than-expected 74,000 for the
month. The arrival of bad winter weather appears to be a big part of
the answer to that question, but it “doesn’t fully explain the loss of
347,000 workers from the labor force,” economist Paul Edelstein at IHS
Global Insight wrote Friday.
The downward participation trend isn’t entirely abnormal, when viewed
over the long term. In part it’s sheer demographics.
Each year now, more baby boomers are reaching age 65 – a trend that
began before the recession. Those people are still counted as part of
the “16 and up” population of potential workers, even though most of
them choose to retire.
But that’s just part of the explanation.
“The work force participation rate for workers between the ages of 16
and 54 fell dramatically during the Great Recession, and has not
recovered,” Mr. Jasinowski wrote.
So the real puzzle is: How much of the decline is truly a long-term
trend and how many people would join the job market if the economy was
Economists at the investment bank Goldman Sachs recently sought to
estimate the size of the “participation gap” – the part of the
participation decline that reflects a weak economy rather than other
changes. Goldman economist Sven Jari Stehn reckoned the figure is
about 2 percent of the labor force – which would be a stunning 3
Currently, about 10.4 million people are counted officially as
unemployed (in the labor force and looking).
Whatever the correct answer to the participation mystery is, it could
help determine the dynamism of the U.S. economy in years ahead. An
economy with more workers, for example, would mean more innovative
talent and more national income.
For now, the economy still has fewer workers than it did in 2007, even
though the working-age population has grown by about 15 million
One result: Where some 63 percent of all working-age Americans had
jobs in 2007, the share with jobs is now just 58.6 percent.
Even as the economy has been in recovery mode, that number has barely
budged for three years. Yes, several million jobs have been created
during that time, but at a rate that essentially treads water with
Federal Reserve officials including the incoming Chair Janet Yellen
will ponder this issue deeply as they consider when to raise interest
If the Fed judges that lots of would-be workers will trickle back into
the labor force, it may try to keep monetary conditions loose long
after the nation’s official unemployment rate comes down toward 6
With the Fed’s foot on the monetary accelerator, more jobs might be
created and more people drawn to participate in the labor force again.
Inflation is a risk, though, if Fed policy ends up being too loose for
The participation puzzle may take some time to solve, because
discouraged potential workers won’t flock back into the job market all
“In the current recovery, it will probably take a few years before
cyclical components put significant upward pressure on the
participation rate,” an analysis by economists including Mary Daly at
the Federal Reserve Bank of San Francisco concluded last year.
But they estimated that such a rebound in participation should come.
“We find evidence… that the recent decline in participation likely
has a substantial cyclical component. States that saw larger declines
in employment generally saw larger declines in participation.”