The Unemployment Rate: Moderation through Participation

Here is a long-form answer to NorthGG’s recent comment.
In October, the unemployment rate breached double digits for the first time since 1983. This number, 10.2 percent, seems bad—one out of every ten Americans is out of work but the number is deceptively benign. In this recession, more than at any other time since the early 1970s, declines in labor-market participation are moderating the unemployment rate.

The unemployment rate including all workers who have left the labor force in the last year is currently about two percentage points higher than the official rate. That is, the drop in participation is currently contributing about 2 percentage points to the unemployment rate. Under this measure, the unemployment rate is currently at a record high.

The contribution from flows out of the labor force is about the same as in the early 1970s. There is an important difference in the current situation and the difference is critical for the long-term outlook for the U.S. economy. In the early 1970s, the baby boomers were just entering the workforce. The drop in participation came as boomers left the labor market to remain in school. They went to school both for economic reasons and to avoid the draft. But, this education pool of workers has been a boon for the U.S. economy and is likely, in part, responsible for the emergence of the U.S. as an economic superpower.

Now, though, the decline in participation is not, for the most part, being driven by the young. It is being driven by the old. The workers leaving the workforce are older. The largest contribution to the decline in participation is among workers between the ages of 45 and 55.

These workers are in the prime earning years. They do not leave the labor force lightly. I suspect that the majority of these workers had jobs that no longer exist. Many of these workers will have to find jobs in new industries. A lot of their industry-specific human capital has been destroyed. Almost certainly, at least for a time, the new job will pay less than the old job. Even when they eventually find work, they will be a drag on growth.

What do we do with the large mass of dislocated workers over the age of 45? They are too young, and too poor, to retire. I don’t know the answer but I have a feeling that without this answer the U.S. economy is not going to remain an economic superpower for long.

To formulate policy, we need data. We do not know why these workers are not working. We need to find out who these workers are. What jobs did they hold? Why are they no longer working? What skills do they have? What skills do they need? Are there similar workers in similar circumstance that have managed to stay working? Why did one group perform well and another poorly?

Once we have the answers to these questions then, and only then, we can begin to formulate a policy response. With funding the BLS and the Census Department could answer these questions in a few months. There is no point in throwing money desperately at job creation programs until we understand the source of the jobs problem.