The August jobs report set two records that we need to talk about. Both involve the labor participation rate -- the share of the working-age population that has a job or is looking for a job. First, men's participation rate fell to its lowest point on record (since 1948). Second, the overall participation rate fell to its lowest point since 1981.
So, three years into a recovery, we are at a modern historical low for working-age adults who are actually working, or trying to find work. It's horrible new. It means we make less stuff, have less wealth, and pay fewer taxes. It's bad for growth, bad for deficits, bad for the stock market. (Weirdly, it also makes the unemployment rate seem artificially low.)
But why is this happening? There are two reasons. The first is that America is getting older, and more workers are entering that age where they are less likely to be employed. Imagine the enormous Boomer generation moving along this graph below, from left to right, as they age into their 60s and 70s. You can see how the labor participation rate would fall automatically, good economy or bad.
That's exactly what demographers have expected: A gradual decline in the participation rate as the Boomers retired and smaller generations beneath them struggled to replenish the working population. The dotted lines in the graph below are projected declines from before the Great Recession. The red line is what's actually happened. The hill has been steeper than we foresaw.
So, one interpretation of the Great Recession is that it has accelerated our labor participation fall-off by five to ten years. Older workers, who have faced the worst long-term unemployment crisis (they're more expensive; harder to train; and possibly subject to ageism) might be retiring early. As we've reported, the recession has also coincided with a sharp increase in applications for disability benefits and it's clear that, in addition to the one million older Americans who have been looking for work unsuccessfully for more than six months, hundreds of thousands have dropped out and retired early.
And that brings up the second reason why more people aren't participating in the work force: They don't think there's any work for them.
There has been a long debate over whether the recession is pulling down participation stronger than demographics. A February 2012 study found that the aging workforce accounted for 75% of the decline. But in the last few months, the Great Recession's impact might have strengthened. The share of people not in the labor force who say they do want a job has turned sharply up since March, hitting a post-recession high. Here's that graph:
To review: The combination of an aging workforce (which we cannot control) and a weak economy (which we can control) has tugged down the participation rate, which in turn has tugged down the unemployment rate -- and threatens to make us poorer in the long term. So when you hear somebody quoting that "unemployment has hit a three-year low" make sure they also report that "participation rates hit a 31-year low."
Oh, and what about the guys? Men's participation hit an all-time low in August. This is a record, but it's not a surprise. Male participation has been in outright decline since the 1950s, as the share of working-age women who are actually working has practically doubled since the late 1940s. Here's that picture, with men in BLUE, women in RED, and total participation in GREEN.
Most of this decline has come from older men's participation dropping dramatically since the 1950s. It's same factors we talked about above are in play. The the male population is getting older, making them less likely to work, and the economy is discouraging many from seeking a job, anyway.
But there are two more forces pulling down men's participation. In fact, they two of the most important economic trends of the last 50 years: The rise of women and the growth of the safety net. Dual-earner households have allowed men to either choose to not work or to retire early. That's part of the decline. But, perhaps even more importantly, the increase in Social Security payments, plus Medicare and Medicaid, have allowed older men to stop working and rely on government insurance programs to protect them from the risk of elderly poverty and medical catastrophe.
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