Keeping an Eye on the Labor Participation Rate

We should be watching the labor participation rate, not the unemployment rate.

Every month, the federal government releases the nation’s unemployment numbers. The jobless numbers dropped nearly every month last year, which some in the media proclaimed a good thing.

For instance, in December, the unemployment rate dropped to 6.7 percent, the lowest rate since October 2008. However, the amount didn’t necessarily drop because the economy is stronger. It declined because more than half a million people left the labor force. The unemployment rate’s dramatic decline for 2013 is due primarily to people no longer being counted.

Rather than looking at the unemployment rate, we should be watching the labor participation rate. As of December, 62.8 percent of Americans had a job or were actively seeking work. That’s the lowest level since April 1978 — nearly 36 years ago.

Those not in the labor force shot up by 525,000 people. These are not all baby boomers and people entering into retirement. An article on proved that by analyzing labor participation rates by age. Bottom line, the dramatic decrease of those in the labor force is not due to the retirement of baby boomers.

Critically, the research shows that the problem is only going to get worse for the rest of the decade, with retirements accounting for two-thirds of the decline of participation rate by 2020. In other words, the rate will keep declining, no matter how well the economy does.

The number of Americans working or actively seeking work has actually fallen faster than demographers had predicted, and the participation rate for workers between ages 16 and 54, which fell sharply during the recession, still hasn’t recovered. Part of the reason for the latter may be that people are not entering the work force at the same rate because they are spending more time getting an education.

My fear is that, by misreading the trends in labor force participation now, policymakers might feel a false sense of security about the state of American job creation. By ignoring the vanishing workforce for the last 10 years or so, policymakers underestimated the weakness of the American economy. We don’t know why nearly 4 million workers vanished before the recession; why would we assume they will eventually return?

Monetary policy might need to be even more aggressive to speed-up growth more than it already is. This debate isn’t a distraction. For a lot of workers — and for future economic growth — it’s a big part of the ballgame

Meanwhile, Barclays’ economists say that just 15 percent of the drop in the labor force stems from people who want a job and are of prime working age (25-54). “We view the possibility of a large and sudden return of previously discouraged job seekers to the labor force as remote,” they wrote in The Washington Post.

While I understand Barclays pessimism, I see huge upside for private employers.

Savvy employers can create mentor and training programs, regardless of the business they’re in. There is an enormous opportunity for the private sector to capture the disengaged, discouraged workforce and find ways to infuse them with hope and opportunity at your place of business.

Businesses will need to take a strategic initiative approach and invest in marketing/public relations programs to intrigue the disengaged job seeker, and then create a career path that shows them the financial and personal rewards of working at your company. Once people are infused with a brighter future, they will be the best recruiting force on the street for new employees. As the data shows, these people are being ignored by the government, which creates an opportunity for private businesses to make a huge difference in the lives of the unemployed and underemployed, impacting both the business and the local community.