What to Watch on Jobs Day: Yes, We Should Still Be Worried About the Labor Force Participation Rate

The employment data last month showed that just 74,000 payroll jobs were added in December. It is unlikely that the underlying job growth rate is this weak, so the January data, which comes out on Friday, should look substantially better. However, beating 74,000 jobs is a very low bar. To get back to pre-recession labor market conditions in three years, we would need to be adding 285,000 jobs per month. It’s more likely that we’ll see something closer to the average number of jobs added per month in 2013, which was 182,000. At that rate it will take well over five more years to get back to health in the labor market.

Another thing to watch is the labor force participation rate (LFPR), which has dropped from 66.0% to 62.8% over the last six years.  My estimates suggest that about one-quarter of that drop is due to long-run factors like baby boomers hitting retirement age and increasing college enrollment of young people, and had nothing to do the Great Recession or the weak recovery. That means about three-quarters of the drop in LFPR is due to potential workers either dropping out of, or never entering, the labor force because job opportunities are so weak.

The labor force may have dropped further in January, due to the expiration of federal unemployment insurance benefits in December. Careful research (here and here) shows that these benefits were keeping people in the labor force. To receive unemployment insurance, workers must be actively seeking work, so receiving UI was giving people a reason to keep looking for work even though job prospects are bleak. (This is actually a good thing because it may increase the share of displaced workers who ultimately find work). A drop in labor force participation due to the expiration of UI extensions would likely lead to another “bad” kind of drop in the unemployment rate—one that comes from potential workers giving up looking for work, not potential workers finding work. This would compound an already serious issue—there are already 6 million “missing workers,” who, because of weak job opportunities, are neither employed nor actively seeking a job. If these missing workers were in the labor market looking for work, the unemployment rate would be 10.2% instead of 6.7%.

  • DHFabian

    Reality: At no point have we had a country where everyone was employable, and there were jobs for all who needed one. We’ve been shipping out jobs for years. Yet when Bill Clinton ended welfare, declaring that “there is NO excuse” for long-term joblessness, American workers applauded. No excuse – not illness, not circumstances, not the lack of available jobs. We have been discarding those pushed out of the job market since 1996. We all know that you can’t get a job once you no longer have a home address, phone, bus fare. These are simply our “surplus population.” Since 1996, we have comfortably referred to those left destitute, homeless, as people who merely “dropped out,” “discouraged workers.” Nothing has changed. The fact that media has, for whatever reason, chosen to highlight this issue temporarily, doesn’t change anything. We are simply living with the policy choices we, ourselves, made.