VASANTH KUMAR – NOVEMBER 17TH 2020
EDITOR: KALEY KRANICH
The September 2020 Jobs Report released by the Bureau of Labor Statistics (BLS) offered a solid, if not rosy, image of the US labor market as the unemployment rate decreased by 0.5 percentage points to 7.6%, decreasing the total number of unemployed workers from 13.55 to 12.58 million.The report showed increases in leisure, retail, and health care were offset by smaller decreases in government, resulting in a net increase of 275,000 jobs. Quick math indicates a clear discrepancy in these numbers where the total number of unemployed workers decreased by 970,000, but only 275,000 jobs were added. So, where did the remaining 695,000 unemployed workers go? The answer relies on a statistic that is less famous than unemployment, but just as consequential: the labor force participation rate (LFPR). The LFPR is a measure of how many Americans are working or looking for work. Although the unemployment rate and the LFPR differ in the message they send about the health of the economy, both are crucial in helping economists understand how labor markets work in the short-term wake of a recession and in the long-run course of the economy.
To calculate these statistics, the BLS administers a comprehensive survey to American workers that separates them into two groups based on their employment and intent to work. The first and largest of these groups is the civilian noninstitutional population, which includes all adults over the age of 16 who are not “institutionalized” (in the military, imprisoned, or in a care facility such as a nursing home). This group identifies everyone in the United States who has the potential to work. The second group is the civilian labor force, a subset of the civilian noninstitutional population that only includes people who are either working (employed) or actively seeking work (unemployed). To be considered employed, a worker must have had at least one hour of paid work in the past week. However, the BLS only considers a worker unemployed if they are available to work, and, within the previous 4 weeks, had “actively” searched for work (e.g., meeting for job interviews, contacting an employer/recruiter, or posting a job advertisement).
Given these strict requirements, there are numerous instances in which an unemployed worker would not necessarily be considered unemployed. For example, if a worker were laid off in August and since then unsuccessfully searched for job openings, the worker would not qualify as unemployed. Instead, they would be considered “out of the labor force.”
These two groups are then used by the BLS to calculate the unemployment and labor force participation rates. The unemployment rate is formally defined as the proportion of the labor force that is unemployed:
Unemployment Rate = umemployed/population
And the LFPR is defined as the proportion of the civilian noninstitutional population that is in the labor force:
Labor Force Participation Rate = labor force/population
While these technical definitions for unemployment and the LFPR may seem unnecessarily convoluted at first, a full understanding of their meaning can explain why economists are worried about the September Jobs Report. For instance, if an unemployed worker, frustrated by the paltry job opportunities in the current labor market, decides to stop looking for work, they would no longer be included in economists’ calculation of the unemployment rate. In fact, their exit from the labor market would actually make the unemployment rate decrease. This decision to end their job search would, in turn, cause the LFPR to decrease, explaining where the “missing” 695,000 jobs went. In the September Jobs Report, the BLS reported that the number of people “not in the labor force” increased by 879,000 (the extra 184,000 came from an increase in the civilian noninstitutional population). This subsequently brought down the LFPR by 0.3 percentage points to 61.4%, which itself is 2 percentage points lower than in February 2020.
Additionally, the composition of the unemployed and those out of the labor force can explain what might be causing this decrease. Of those not in the labor force, the BLS measures “discouraged workers,” who are those unable to rejoin the labor force because of job scarcity or barriers from education, experience, or discrimination. The total number of discouraged workers increased by 46,000 in September, and, although this was proportionally negligible, is a notable reversal from the decrease in July 2020. Another key group is a subsection of the unemployed known as “permanent job losers,” or those who involuntarily left their jobs. This category of workers sharply increased by 345,000 this September. Although this group is still included in the labor force, it is important to note that this statistic has been increasing since March, and could potentially lead to a more significant exit from the labor force in the near future. Accordingly, the COVID-19 pandemic has tightly constrained the supply of jobs to American workers, and is pushing them out of the workforce.
However, this fall in the LFPR may not solely be the fault of the COVID-19 pandemic. Over the past 50 years, the LFPR has also been a useful indicator of structural changes to the composition of the American labor force. From 1970-2000, the United States experienced a strong and steady growth in the overall LFPR, famously driven by the entrance of women and the Baby-Boomer generation into the workforce. Although, this growth was not even as the LFPR for “prime age” men (between the ages of 25-54) has been consistently decreasing since the BLS began recording labor market data in 1948.
After peaking at 67.1% in 2000, however, the LFPR started to decline. The causes of this decline are much less clear than the previous 30 years of growth. Over the years, the decreasing LFPR of prime age men has accelerated, and the LFPR for prime age women plateaued in 2000 and began to decrease in 2008. The most likely and significant cause for these declines are the decreasing population growth rate and the exit of the Baby-Boomer generation from the prime age workforce. Several other causes have also contributed to this decline, including the dependence of prime age men on pain medication (half of men out of the labor force were on a prescribed pain medication in 2013) and the decision by young people (age 16-24) to pursue more years of higher education at the expense of working (the LFPR for young people decreased from 65.5% in 1999 to 55.9% in 2019).
Another influential determinant of the LFPR that has become apparent in recent years is the business cycle of short-term booms and busts. While the unemployment rate is typically considered a better reflection of output, the aftermath of the three recessions since 2000 (2001, 2008, and 2020) shows that the LFPR can decrease with output. The reverse has also occurred since 2000: from 2015-2018, during the height of the pre-COVID-19 economic expansion, the LFPR had increased. This increase made up for 40% of the 2000-2015 decline for men and 25% for women. As a result, economists believe that the LFPR is affected by both the cyclical economy (recessions and booms) and the structural makeup of the labor market (long-term demographic trends). The proportion to which each is responsible for changes in the LFPR is still debated. A paper by the Federal Reserve Bank of Boston believed the influence of the Great Recession to be “significant” compared to demographics, while a Presidential Report from 2014 found that only one-third of the change in the LFPR over the same period was due to the recession.
However, economists do agree on two key traits of the LFPR in relation to the economy. First, sustained high or low unemployment sends important messages to workers about whether to enter or exit the labor force. Just as the prolonged high unemployment during and after the Great Recession had a discouraging effect on the LFPR, the 2015-2018 expansion resulted in an unnaturally low unemployment rate of 4.0% in 2018. This convinced workers on the margins (especially older workers) to re-enter the workforce, eliminating the losses in participation from the recession. Second, the LFPR will continue to decline over the next decade from 63.1% to 61.2% in 2029, as demographic forces end up overpowering the short-term influence of the business cycle. Slowing population growth, aging, and higher education will all continue to pull working-age adults from the labor market, slowing employment and GDP growth. The ramifications of this economic maturity will be widespread and consequential over the next decade, making the LFPR a key measure of how much and how quickly the US will have to cope.
Regardless, the short-term implications of the LFPR are just as significant as the long-term. The correlation between cyclicality and the LFPR is notable because it indicates that the unemployment rate cannot be considered an all-encompassing measure of economic health. As the Great Recession showed, prolonged high unemployment can be a significant incentive for workers to exit the labor market altogether, resulting in a declining unemployment rate that conceals a more precarious economic reality. The September Jobs Report is a clear example of how changes in the LFPR can be just as informative as changes in the unemployment rate when measuring the state of the current economic recovery.
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