Mystery in lower jobless rate: Why are adults dropping out of work force?

The US unemployment rate dropped to 6.7 percent in December, but mainly because long-term discouraged workers quit the labor force – a persistent problem tied to the Great Recession.

The US unemployment rate fell significantly in December, but the big reason for the shift isn’t necessarily a comforting one for the economy.

The jobless rate dropped to 6.7 percent of the work force, the lowest level since October 2008.

But the shift came only partly because unemployed people were finding work. Rather, the main driver of the change was people who exited the labor force by ceasing to look for work.

And this wasn’t a one-month anomaly. Rather, the trend of people opting out of the labor force has become a post-recession norm.

“To me, the most troubling jobs data is not the unemployment number but rather the disheartening decline in the percentage of Americans working or seeking a job,” economist Jerry Jasinowski, a former president of the National Association of Manufacturers, wrote in November. “In 2007, that number stood at 66 percent. Today it is 62.8 percent, the lowest since 1978.”

Since then, the problem has persisted. The so-called “participation rate,” the share of working-age people who have a job or want one, edged up in November and then back down in December as the labor force shrank by 347,000.

That shrinkage was central to the decline in the unemployment rate, because people are only counted as jobless if they are participating in the labor force by actively seeking work.

Initial news coverage of the December jobs figures from the Labor Department focused on a different mystery: why job creation by the nation’s employers came in at a lower-than-expected 74,000 for the month. The arrival of bad winter weather appears to be a big part of the answer to that question, but it “doesn’t fully explain the loss of 347,000 workers from the labor force,” economist Paul Edelstein at IHS Global Insight wrote Friday.

The downward participation trend isn’t entirely abnormal, when viewed over the long term. In part it’s sheer demographics.

Each year now, more baby boomers are reaching age 65 – a trend that began before the recession. Those people are still counted as part of the “16 and up” population of potential workers, even though most of them choose to retire.

But that’s just part of the explanation.

“The work force participation rate for workers between the ages of 16 and 54 fell dramatically during the Great Recession, and has not recovered,” Mr. Jasinowski wrote.

So the real puzzle is: How much of the decline is truly a long-term trend and how many people would join the job market if the economy was healthier?

Economists at the investment bank Goldman Sachs recently sought to estimate the size of the “participation gap” – the part of the participation decline that reflects a weak economy rather than other changes. Goldman economist Sven Jari Stehn reckoned the figure is about 2 percent of the labor force – which would be a stunning 3 million people.

Currently, about 10.4 million people are counted officially as unemployed (in the labor force and looking).

Whatever the correct answer to the participation mystery is, it could help determine the dynamism of the US economy in years ahead. An economy with more workers, for example, would mean more innovative talent and more national income.

For now, the economy still has fewer workers than it did in 2007, even though the working-age population has grown by about 15 million people.

One result: Where some 63 percent of all working-age Americans had jobs in 2007, the share with jobs is now just 58.6 percent.

Even as the economy has been in recovery mode, that number has barely budged for three years. Yes, several million jobs have been created during that time, but at a rate that essentially treads water with population growth.

Federal Reserve officials including the incoming Chair Janet Yellen will ponder this issue deeply as they consider when to raise interest rates.

If the Fed judges that lots of would-be workers will trickle back into the labor force, it may try to keep monetary conditions loose long after the nation’s official unemployment rate comes down toward 6 percent.

With the Fed’s foot on the monetary accelerator, more jobs might be created and more people drawn to participate in the labor force again. Inflation is a risk, though, if Fed policy ends up being too loose for too long.

The participation puzzle may take some time to solve, because discouraged potential workers won’t flock back into the job market all at once.

“In the current recovery, it will probably take a few years before cyclical components put significant upward pressure on the participation rate,” an analysis by economists including Mary Daly at the Federal Reserve Bank of San Francisco concluded last year.

But they estimated that such a rebound in participation should come. “We find evidence … that the recent decline in participation likely has a substantial cyclical component. States that saw larger declines in employment generally saw larger declines in participation.”