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The labor force participation rate is at a low point (updated)

Mitchell Hartman Nov 7, 2014
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UPDATE: October’s numbers are in from the Bureau of Labor Statistics: 214,000 jobs added, and the unemployment rate “edged down” to 5.8 percent. 


The monthly employment report from the Department of Labor will likely show the economy added approximately 240,000 jobs in October, and unemployment held steady at 5.9 percent, after falling below 6.0 percent in September for the first time since mid-2008.

Economists can point to steady improvement over the past several years in those two statistics—job creation, and the unemployment rate (which was 7.2 percent in September 2013, and 9 percent two years earlier).

Yet, this ‘official’ unemployment rate doesn’t accurately characterize many aspects of the labor market right now—in particular, how hard it still is to land a middle-income job; how easy it is for employers to find qualified candidates; and how little those employers have to compete with each other over wage and benefit offers, in order to hire the workers they want.

The ‘official’ unemployment rate—called the U-3 by the Bureau of Labor Statistics—only counts how many people are actively unemployed. They’re looking for work and actually applied for a job in the past four weeks.

But right now, the number of people who are not working, but would like to work, is unprecedentedly high. These people have given up looking—possibly because they don’t think any jobs are available for them, or perhaps to attend school and upgrade their skills, or to go into semi-retirement. They’ve pushed down the labor force participation rate to its lowest level (62.7 percent in September) since the late 1970s.

Combine these discouraged and marginally attached workers with the ‘underemployed’—people who would like to find better-paying full-time jobs but can only find part-time jobs—and total unemployment (the U-6 rate), as measured by the BLS, is averaging well over 12 percent in 2014 (it was 11.8 percent in September).

Economists have anticipated that some attrition in the labor market would occur when the Baby Boomers began retiring earlier this decade. But in fact, after the recession, older workers have stayed on the job longer than was predicted, on average. With retirement savings and home equity depleted by the recession, older Americans are holding on to jobs if they can.

“Where we’re seeing large declines in labor force participation is actually among prime-age workers,” explains University of California-Berkeley economist Jesse Rothstein, “especially among people in their early twenties. It’s hard for me to believe that there’s this enormous group of people in their early twenties who have decided that they’re never going to work.”

Rothstein and many other economists believe the economy hasn’t changed structurally so that fewer people want to work or feel the financial need to work. Rather, they think the labor market is simply too weak, and demand in the economy too anemic, to employ all the potential workers who want and need jobs. They believe if the economy strengthens significantly, many of those potential workers will come out of the woodwork and begin job-hunting again.

Absent such improvement, the labor market is likely to remain slack, even if the official unemployment rate continues to decline steadily and eventually dips below the Federal Reserve’s target of 5.5 percent. Fed policymakers, led by chair Janet Yellen, have said they are looking at other labor market indicators in addition to the unemployment rate, to make sure they don’t withdraw economic stimulus and kill the nascent recovery before it’s helped the hard-core and long-term unemployed, the underemployed, and discouraged workers.

Rising wages are now considered a key harbinger of labor-market tightening by market participants and Fed policymakers, explains economist John Canally at LPL Financial.

“I think that’s the ultimate indicator—to get wage growth back to normal, back to the 3.5-percent-to-4.5-percent gains we saw prior to the Great Recession,” said Canally. “Then I think there’ll be confidence that businesses are finding it more and more difficult to fill jobs.”

In recent years, average hourly earnings have been rising in the 2-percent-per-year range, just keeping pace with inflation.

Another indicator of a tightening labor market would be a reverse in recent declines in labor force participation, especially among prime-age workers. If more people who have dropped out of the workforce, or never entered it after high school or college,  started looking for work again, that might raise the unemployment rate temporarily. But it would be another sign the economy is truly on the mend.

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