Yesterday, I read an interesting report from Barclays Capital debunking a piece of conventional economic wisdom.
American labor force participation — that is, the percentage of working-age persons who are employed or are looking for a job — has been down since the financial crisis in 2008, putting us on par with Europe, as I noted last year in my cover story on economic mobility. That’s been a big hit to the idea of America as a land of opportunity. Labor force participation in the U.S. now stands at only 63%. Lots of investors and economists believe that’s because so many job seekers out there during the Great Recession and the jobless recovery grew frustrated and gave up looking.
Remember that official unemployment rate calculations count people who are looking for work — but not those who have given up and stopped looking — as unemployed. As a result, when people give up looking for work, it can have the counter-intuitive effect of making the unemployment rate look better. And theoretically, the reverse can also be true — but here’s where the conventional wisdom goes astray: Now that the economy is truly expanding once again, many observers are predicting that formerly discouraged workers will flood back into the labor market and reverse the decline in unemployment that we’ve seen over the last few months.
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Not so, says the macro-economic team at Barclays. They ran models showing that demographics, and especially retirement amongst baby boomers, has played a larger role in pushing the labor participation rate down than other factors have. “Only about a third of the drop in the labor force participation rate is accounted for by those who say they want a job, and only about 15% by those who want a job and are also of prime working age – i.e., between 25-54,” says the report issued Thursday. What’s more, historically, re-entrants into the labor force haven’t really played much of a role in changing the unemployment numbers.
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That’s good news for President Obama, who needs the unemployment number to keep ticking down in order to ensure victory in November. What I wonder about, though, is this: If, as many economists predict, inflation rises, and if entitlements are eventually cut, how many of those 55 and older Americans will decide that they have to go back to work, whether they want a job or not.
I do think employment dynamics are changing in ways that are extremely hard to predict right now, thanks to a push for entitlement reform, a trend towards in-sourcing, and the increasing lifespan of people in wealthy countries. But I basically buy the Barclays idea that in the short term, at least, the idea of a surging labor force of formerly frustrated job seekers is an “urban legend.”
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