A very long post about labor force participation that you should read anyway

A lot of people are blogging this David Leonhardt piece on measuring "true" unemployment:

Over the last few decades, there has been an enormous increase in the number of people who fall into the no man’s land of the labor market that Carroll Wright created 130 years ago. These people are not employed, but they also don’t fit the government’s definition of the unemployed — those who “do not have a job, have actively looked for work in the prior four weeks, and are currently available for work.”

Consider this: the average unemployment rate in this decade, just above 5 percent, has been lower than in any decade since the 1960s. Yet the percentage of prime-age men (those 25 to 54 years old) who are not working has been higher than in any decade since World War II. In January, almost 13 percent of prime-age men did not hold a job, up from 11 percent in 1998, 11 percent in 1988, 9 percent in 1978 and just 6 percent in 1968.

Even prime-age women, who flooded into the work force in the 1970s and 1980s, aren’t working at quite the same rate they were when this decade began. About 27 percent of them don’t hold a job today, up from 25 percent in early 2000.

There are only two possible explanations for this bizarre combination of a falling employment rate and a falling unemployment rate. The first is that there has been a big increase in the number of people not working purely by their own choice. You can think of them as the self-unemployed. They include retirees, as well as stay-at-home parents, people caring for aging parents and others doing unpaid work.

If growth in this group were the reason for the confusing statistics, we wouldn’t need to worry. It would be perfectly fair to say that unemployment was historically low.

The second possible explanation — a jump in the number of people who aren’t working, who aren’t actively looking but who would, in fact, like to find a good job — is less comforting. It also appears to be the more accurate explanation.

This attracted the attention of Felix Salmon, who says:

I'd like to see the nonemployment figures reported alongside the unemployment figures in the monthly jobs report. Neither tells the full story, but both together are richer than either one alone.

Actually, the BLS makes a pretty good stab at calculating this number: it lists figures for "discouraged workers" who say they want to work but are not looking for a job for economic reasons, and "marginally attached workers", who say they want to work, and have looked for work in the last 12 months, but did not seek work in the last four weeks for some personal reason. These are in the labor report right beneath the "headline" unemployment figure; it's just that journalists usually ignore them. That is a problem, but something the Bureau of Labor Statistics (BLS) cannot control.

That said, when I look at the BLS figures, I don't see the same catastrophe that David Leonhardt apparently reads in them. In 1982, according to this report from the BLS, the labor force participation rate for prime aged (24-55) males was 94%. In 2012, with the Baby Boomers retiring, it is projected to fall to . . . 91%. The participation rate for women, after rising for decades, has flattened out, but any drop is probably attributable to delayed childbearing, which swelled the tally in previous years.

Meanwhile, since 1994 the BLS has been providing a nice addendum to the Employment Situation Survey, with the enticing title of "Table A13: Persons not in the labor force and multiple jobholders by sex, not seasonally adjusted". That table breaks down how many people are not in the labor force, and how many of them say they want a job. The numbers for January of 2008, the last date for which data are available, are 4.9 million people out of the labor force who say they want a job, from a total of 79.7 million people out of the labor force. Of those 4.9 million, only 1.5 million had actually attempted to look for work in the last twelve months.

Now, one could argue that 4.9 million, or 1.5 million, is a lot of people. This is true. But if you go to the historical data section of the BLS website, and call up the figures for 1994-2008, you'll see that this figure is not really rising. In January 1994, as we pulled out of a recession, it was 6.9 million people. By 2000, at the height of the bubble, it was all the way down to 4.4 million, and has crept back to the current level since, around which it has been fluctuating for several years. Right now, we have about as many people out of the labor force who say they want work as we did in 1997. Since 1997, however, the population has grown a great deal. Just between 2000 and 2006 (the last year for which the census has data), it grew by 17 million.

This just doesn't match Leonhardt's story.

A better explanation, I think, would combine one thing that he emphasizes--falling real wages for the lowest skilled--with a slight boost in stay-at-home moms and a widening of eligibility for social insurance programs, particularly disability. Austan Goolsbee wrote about this in the very New York Times five years ago:

Research by the economists David Autor at the Massachusetts Institute of Technology and Mark Duggan at the University of Maryland shows that once Congress began loosening the standards to qualify for disability payments in the late 1980's and early 1990's, people who would normally be counted as unemployed started moving in record numbers into the disability system -- a kind of invisible unemployment. Almost all of the increase came from hard-to-verify disabilities like back pain and mental disorders. As the rolls swelled, the meaning of the official unemployment rate changed as millions of people were left out.

By the end of the 1990's boom, this invisible unemployment seemed to have stabilized. With the arrival of this recession, it has exploded. From 1999 to 2003, applications for disability payments rose more than 50 percent and the number of people enrolled has grown by one million. Therefore, if you correctly accounted for all of these people, the peak unemployment rate in this recession would have probably pushed 8 percent.

The point is not whether every person on disability deserves payments. The point is that in previous recessions these people would have been called unemployed. They would have filed for unemployment insurance. They would have shown up in the statistics. They would have helped create a more accurate picture of national unemployment, a crucial barometer we use to measure the performance of the economy, the likelihood of inflation and the state of the job market.

Unfortunately, underreporting unemployment has served the interests of both political parties.

Since then, the number of claims has continued to rise:

(Chart from the SSA)

People are leaving the labor force because they have a better alternative--motherhood or disability payments or early retirement--not because they can't actually find jobs. To be sure, part of the reason that disability is a better alternative is that compensation isn't growing for low-wage workers. But it is also a better alternative because we've made it easier to get on. I make no claims as to whether the people getting disability "should" qualify--but it complicates the labor force story considerably.

Update: Andrew Samwick has more.