When both the civilian labor participation rate and the unemployment rate show a downward trend, there is a definite indication that something is amiss in the calculation of unemployment. In August, the labor force participation rate (percentage of people over the age of 16 who either have a job or actively searching for one) has fallen to 63.2%. The last time it was this low was thirty-five years ago in August of 1978. This means that over 90 million Americans are currently not in the labor force. Meanwhile, the BLS reported in August that the unemployment rate dropped 0.1 percent to 7.3 percent.
Obviously, there is a clear disconnect between the unemployment rate and the labor force participation rate, and a large question surfaces – Where has the workforce gone?
Labor Force Participation Rate, 1978-2013 (Seasonally Adjusted)
Earlier this year, TrendLine presented this issue to readers by analyzing how a major part of the population is left out when calculating the official unemployment rate. The research team at DCR Workforce has dug deep into the data to conduct econometric research, bringing up the following questions to narrow the area of discussion and keep it focused:
Are We Ignoring a Productive Labor Force Group in the Unemployment Rate Calculation?
Civilian Unemployment Rate, 2009 to 2013
Often workers have difficulty finding positions that match their skill sets and eventually lose interest in the job hunt. They become discouraged and stop actively looking for a job. This portion of the population is not considered in the unemployment rate calculation.
While the unemployment rate has been steadily decreasing since its high of 10 percent in October of 2009 to 7.3 percent in August of 2013, the percentage of Americans in the labor force has not risen. The sample of workers actively seeking work is becoming smaller and the unemployment rate is being calculated on this smaller group. With so many workers no longer looking for work, it is arguable that the falling labor force participation rate is driving much of the decline in the country’s unemployment rate. To be counted as unemployed, based on the BLS calculations, you actually have to be actively searching for a job.
According to Gallup, when including individuals who are underemployed, the unemployment rate is 17.7 percent!
An Example of the Relationship between the Labor Force Participation Rate and the Unemployment Rate
Let’s say we have a country of ten people. Albert, Amanda, Alex, Ava, and Adam have full-time jobs. Brandon and Barbara have lost their jobs and are looking for work. Cynthia, Clyde and Carter have retired.
At this status, the labor participation rate is 70 percent because seven in ten have a job or are actively looking for a job. The three who are retired are out of the labor force. The unemployment rate would be 28.6 percent because two out of the seven (the labor force) do not have a job.
Now, Brandon has been looking for a job for months but has now lost hope. He gives up looking, thus leaving the labor force. The labor force participation rate then decreases to 60 percent. But even though Brandon is not working, the unemployment rate also goes down. No one has found new work, but the unemployment rate, based on the labor force number of 6 now, would be 16.7 percent. Of the six people left in the labor force, only one – Barbara – is not employed.
So you can see that looking at the unemployment rate, without considering the labor force participation rate, can sometimes hide the negative effects of discouraged workers. <<End highlighting here>>
Are There Qualified Workers for the Available Jobs?
“The bottom rung of job seekers – those who lack skills or whose skills are a mismatch for demand – are discouraged and no longer appear on the list of those unemployed even as thousands of skilled positions remain unfilled in almost every market.” ~Neal Bhamre, Field Consultant for Express Employment Professionals
In 2013, some jobs were harder for recruiters to fill, and most of them require workers with specific skills and higher qualifications.
These jobs include:
The Bureau of Labor Statistics (BLS) reported that there are 3.9 million job openings in the U.S. However, many of the available workers who are actively searching for jobs are not a good fit for the available jobs because they do not have the training, experience or skills to successfully fill open positions. A study in 2013 by CareerBuilder and the American Staffing Association found that “3 in 5 hiring managers say there is a skills gap in their industry.”
Fast changing technology and its application in almost all fields of employment is requiring workers to upgrade their skills and knowledge more frequently than ever before. Computer automation of work previously manually performed is leading to fewer jobs in manufacturing, clerical and retail work. Improved machines and software may soon expand into law, financial services, education and medicine.
Workers who have been out of the job market either due to positions not being available or because their skills do not match what employers require are bound to be constantly falling behind, unless they are able to identify and overcome the skills gap. This skill gap also helps to explain why many workers have given up on finding jobs for which they are qualified.
“In 2012, the average monthly job opening rate rose from 2.3 percent to 2.6 percent. The increase in average monthly hires and separations, however, were not as large.” ~Bureau of Labor Statistics
Who are these Unconsidered Workers?
With the labor force participation rate clearly indicating that the workforce is shrinking, analysts are keen to identify who are these discouraged workers that are not counted in the unemployment rate calculation.
Baby Boomers: The generation of those born between 1946 and 1964 are retiring from the workforce. The first Baby Boomers turned 60 in 2006, and the size of the generation comprises 26.4 percent of the population making up the largest percentage of the U.S. workforce at 38 percent. Their retirement thus impacts the labor force participation rate significantly. While some Baby Boomers are retiring on schedule, there are younger Boomers who have left the labor force due to not having a choice. These workers lost long-held jobs during the economic downturn, and are now having difficulty re-entering the labor market.
Millenials: There are an estimated 1.8 million young adults who are not in the labor force because they have temporarily given up on job-hunting. A 2012 Pew Research Center study found that 36 percent of Millennia’s in the U.S. are living with their parents. According to Census Bureau data, from 2005 to 2012, the percentage of men aged 25 to 34 living in their parents’ home rose from 13.5% to 16.9%, while women of the same age group living at home rose from 8.1% to 10.4%
“The recent withdrawal of prime-age workers from the labor market is unprecedented.” ~Federal Reserve Bank of San Francisco.
“Disabled” Workers: In 2011, approximately 4.6 percent of the American population between the ages of 18 and 64 received disability insurance. This group is not included in the unemployed, and it is estimated that less than one percent of them have returned to the workforce in the last two years. According to the Social Security Administration, there has been a 44 percent increase in claims by people formerly in the workplace.
“Disability insurance has clearly become, in part, a form of extended unemployment insurance and early retirement, with Medicare benefits.” ~Michael Boskin, Professor of Economics at Stanford and Former Chairman of the President’s Council of Economic Advisors
What Impact does Supporting this Population have on the U.S. Government’s Spend Budget?
As the labor force shrinks, the number of retired Americans grows, which means it costs more per worker to cover entitlement costs. When Social Security started, there were 12 workers for every retiree, and today that ratio is closer to 1.5 to 1.
Social security is only a portion of the U.S. government’s spending on the American population who are not part of the labor force. Please see the table below (data as per August 2013) for our detailed analysis of the impact supporting this population has on the governmental spend and budget.