Here's Why You Shouldn't Freak Out About the Shrinking Workforce

Beware the mehs of March. Buried in the latest disappointing jobs number -- one that not only failed to meet expectations, but also failed to tell us whether we are SAVED or DOOMED -- was a not-so-good nugget that actually was not-so-bad. Which is almost reason to be optimistic. (How's that for optimism!)

Fewer people were working or looking for work in March: 164,000 fewer people, to be exact. That's bad. Less people in the labor force means, all else equal, that we will produce less stuff in the long run. And less stuff means we have less wealth, lower stock prices, and fewer taxes to pay for retirement. Whether this is merely not great or bleak news depends on what is driving the trend.

There are two broad explanations for the declining labor participation rate. The first is that the Great Recession has kicked so many people to the curb for so long that they have abandoned any hope of landing anther job. The second is that it's mostly demographics. Young people are going to grad school. Moms and dads are choosing to stay home. And, most importantly, Baby Boomers are retiring. Demographics and economics aren't mutually exclusive explanations.

The below chart shows the percentage of people not in the labor force who actually say they want a job. In other words, it shows whether people have stopped looking for work because they're discouraged or because they don't want to work.


Two points stick out. Things are terrible. But they're slightly less terrible. The share of people who aren't looking for work who want work has fallen sharply the past few months, after hitting a post-crisis peak in 2011. That continued in March. Despite the labor force falling by 164,000, the number of people outside the workforce who said they wanted a job fell by 79,000. This is mostly a story about Boomers retiring.

The below chart from Barclays confirms this. Most of the people who don't want work are from the over-55 set.


This is a story about Boomers retiring prematurely. For older folks who have been out of work for too long, retirement might seem like their only choice. It's too late for them to learn new skills -- and even if they could, firms would prefer to invest in younger workers. Maybe their spouse still has a job. Maybe the recently buoyant markets have restored their nest eggs to a decent size. Whatever their thinking, they aren't working. And they won't want to anymore. The Great Recession has simply accelerated what was always going to happen.

None of this means that the jobs crisis is over. But it is getting better. An increasing share of the jobless are people who quit their old jobs. That's unambiguously good news. What's less good is the declining labor force, but it's less bad than the headlines might make you think. Older workers are deciding they have no choice but to get a headstart on their golden year. Unfortunately, it's doubtful it will be quite as golden as they had expected five years ago.