Fed Expects Further Decline in Labor Force

There has been much discussion recently about "discouraged workers" who have been "dropping out" of the labor force, and therefore, reducing the unemployment rate. Many politicians have used the reduced unemployment rate (currently reported as 7%, the lowest in 5 years) as a reason for not extending federal unemployment benefits.

But if one were to dig a little deeper, more accurate data shows that there are millions more who are out of work (and want a job) --- many more than the media and government reports.

But what's even more alarming is, the Fed and other reports show that the declining labor force participation rate is forecast to be even lower than what it currently is --- and that it's also falling faster than earlier predicted.

As was noted in a recent post, just since the Great Recession, the U.S. has had 15.4 million high school grads --- most of whom we would have expected to enter the work force (even if going on to enroll in college). But in a report by Rutgers, they noted a whopping 44% of high school students were unemployed.

And during that same period of time we also had an additional 6.8 million Americans exiting the work force to go on Social Security retirement and disability. In other words, just in the past 5 years alone, we've had many more "non-starters" than "quitters" in the work force that has contributed to a declining labor force participation rate (LPR). Meaning, the declining labor force participation rate isn't just because of Baby Boomer retiring or lazy people "gaming the system" to go on disability. SSDI awards (not applications) actually declined last year.

Millions more are not even counted as part of the labor force any more because after being laid off they couldn't find jobs again (they're called "discouraged workers"). Long-term unemployment is defined as those without jobs for longer than 6 months, but long-long-term unemployment are those who are no longer counted after one year. These people would have also contributed to the declining labor force participation rate (if they were still counted).

In a good article at the Economic Populist titled Employment Stats Misleading, Paul Craig Roberts (former Assistant Secretary of the Treasury under Ronald Reagan) notes that the unemployment rate can decline simply because the definition of the work force excludes "discouraged workers" who are no longer counted as part of the labor force after one year.

"Structural" unemployment is a longer-lasting form of unemployment caused by fundamental shifts in an economy and occurs for a number of reasons –– such as, when workers may lack the required job skills, or if they live too far away from where jobs are available (and are unable to move there). The housing bubble burst and the history of stagnant wages has also contributed to less "mobility" in the labor force, as was reported in several studies.

Paul Craig Roberts noted in his article that real median household income in the U.S. has declined from $56,189 in 2007 to $51,371 in 2012 (a decline of $4,818 or 8.6%); and says real per capita income has declined from $29,554 in 2007 to $27,319 in 2012 (a drop of $2,235 or 7.5%.) People simply can't afford to move to where their might be jobs --- or when a partner or spouse might be expected to quit their job to relocate, because many households nowadays rely on two or more incomes.

So while jobs may be available in some areas (and in some industries), there is a serious mismatch between what companies need and what workers can offer. Structural unemployment can also be made worse by other factors, such as automation (robotics, etc.), as well as by offshoring to lower-wage countries and outsourcing to lower wage States.

Several studies have also concluded that the current problem with long-term unemployed doesn't appear to be because unemployed Americans lack the skills (except in a few anecdotal cases), so this theory has been mostly debunked. As it was recently noted, the editorial board of the New York Times writes:

"There is a durable belief that much of today’s unemployment is rooted in a skills gap, in which good jobs go unfilled for lack of qualified applicants. This is mostly a corporate fiction, based in part on self-interest and a misreading of government data....when there are many more applicants than jobs, employers tend to impose over-exacting criteria and then wait for the perfect match. They also offer tightfisted pay packages."

Hal Salzman, Ph.D., Professor at the Edward J. Bloustein School of Planning and Public Policy and Senior Faculty Fellow at the Heldrich Center, was part of a Congressional panel addressing the impact of the H-1B visa program on the economy, innovation, and the workforce. In an article: What Shortages? The Real Evidence About the STEM Workforce, he says, "Despite naysayers, the nation is producing more than enough quality workers in scientific and engineering fields." (Read: Debunking the STEM Crisis Myth)

And because of the housing bubble burst, and the fact that there is only currently one job for every 3 unemployed (1:3 using the U-3 rate with an unemployment rate of 7% --- or 1:6 using the U-6 rate with an unemployment rate of 13.2 %.), could also indicate that many of the unemployed in the U.S. currently live too far from where there might be any available jobs. Factories can move from State to State (or overseas) faster and easier than people can.

As Paul Craig Roberts noted in his article, of the jobs that have been created during the U.S. recovery, most were "mainly the same lowly-paid, part-time, nontradable domestic service jobs that I have been reporting for a decade or longer." And he also agrees with the statistician John Williams (of www.shadowstats.com) that the REAL unemployment rate is closer to 23.2%.

The labor force participation rate (LPR) is defined as the share of the civilian non-institutionalized population that is employed (working) or unemployed (looking for work). This doesn't include millions of "discouraged workers". The LPR reached its peak of 67.1% in 2000. But it has been declining ever since that time, dropping sharply in the last recession, and currently sits at around 63%.

Since the LPR only counts those in the "labor force", and not all those who are unemployed and want a job (creditable estimates range from 20 to 35 million as of 2013), the LPR would actually be dramatically lower. The Economic Policy Institute estimated that there are at least 5.66 million "missing workers".

David Andolfatto of the St. Louis fed wonders how much of the recent decline in LPR is due to a bad economy ("cyclical factors" --- occurring in cycles; recurrent) and how much of it might be due to long-term trends associated with changing demographics (structural factors). He refers us to a paper by the Boston fed, where they write:

"We provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate."

But David Andolfatto says, "Much of their estimate of LPR trend, however, seems to be based on a particular BLS projection" and then refers us to a St. Louis fed paper titled A Closer Look at the Decline in the Labor Force Participation Rate with this chart and all projections predicting a further drop in the LPR.

In 2006 the Brookings Institute also published a study: The Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Supply --- then stated in their conclusions:

"Most of the decline in the participation rate during and immediately following the 2001 recession was a response to business cycle developments ["cyclical factors"]. However, the continued decline in participation in subsequent years and the absence of a significant rebound in 2005 appear to derive from other, more structural factors...Projections from the model suggest that many of these structural factors will continue to put downward pressure on the participation rate for some time, so that any future cyclical fluctuations in participation will take place around a declining trend." [To date in 2013, there has been no "declining trend".]

And here is the Brookings Institute's chart from 2006, with their projection for the future U.S. labor force.

Note that in their 2006 forecast of the labor force participation rate, the Brookings Institute predicted a decline to 63% by 2015 --- today in 2013 the Bureau of Labor Statistics shows that it's already at 63%.
Now let's also go back and look at the first chart and see where the St. Louis fed predicted the labor force will be in future years (Pretty scary.)

Structural unemployment (offshoring, outsourcing, technology, greater productivity, a rising population base, an increasing number of people looking to enter the work force, stagnant wages, declining household incomes, and more retirees and disabled persons) will continue to further the decline the labor force participation rate unless American companies bring back jobs from foreign countries (jobs that can also add other jobs due to the "multipler effect").

So the current problem with long-term unemployment appears to be, mostly because, not of a temporary business cycle (because of cyclical factors), but more long-term (or even permanent) because of structural reasons. Of course, there are other factors to consider as well. One example might be:

If an engineer were working at Boeing in Washington State, and then Boeing relocated its facility to South Carolina to pay workers a lower wage, and Boeing laid off the engineer, then the engineer may apply for unemployment benefits. But because the engineer relies on their spouse's second income to meet a mortgage payment (and they are underwater on their home), maybe because of financial reasons (or even personal reasons, such as in child custody cases) they can't sell their home and/or move to South Carolina --- meaning, the engineer could not relocate to reapply for their old job. And maybe the engineer is also an older worker (which employers have been reluctant to hire), so the engineer remains unemployed. And because no other comparable jobs were available, the engineer remained unemployed for so long during their initial job search that they eventually became "long-term unemployed", which further lessened their chances for reemployment --- not even for lower paying jobs, because either there were no available jobs (1 for every 3 unemployed), and/or because they were considered "over-qualified", and/or just because the engineer was an older and long-term unemployed person. Then maybe we can suppose that the engineer is long-term unemployed for both cyclical and structural reasons --- the factory moved when the engineer was unable to move (which translates to "declining mobility").

Even America's largest employers (such as the government, Walmart and McDonalds) simply can not create enough jobs (even part-time low-paying jobs) for every one that needs a job. Maybe it's time that we rethink a basic income for all. Otherwise, with rising income inequality and the current trends in offshoring and outsourcing --- and declining wage scales (with the 30-year transition from a manufacturing economy to a service economy), America will have millions more people who will have not have any means in which to support themselves.

But yet, the GOP wants to raise the retirement age to 70 years old when millions of Americans over 50 (like the aforementioned unemployed engineer who has job skills) are still being denied jobs and are already finding it difficult to survive.