The Federal Reserve Bank of San Francisco has a new paper out: Labor Force Participation and the Future Path of Unemployment. This paper touches on two of my favorite issues in this recession: the changing composition of the “out of the labor force” population and size as well as the work experiences of older workers approaching retirement at a point where the elite consensus is focused on cutting their Social Security by raising the retirement age, which I talked about here.
There’s a problem in figuring out how many jobs our economy needs to create because the “Out of Labor Force” participation rate is behaving unpredictably:
The labor force participation rate is highly uncertain because the aggregate trend is determined by heterogeneous patterns among separate demographic groups. The behavior of teenagers age 16 to 19, men age 25 to 54 in their working prime, and workers age 55 and over are particularly difficult to predict. Figure 2 plots the historical labor force participation rates of these groups.
The population that ends up out of the labor force, which are people who aren’t employed for money or aren’t actively looking for a job, is increasing. Here’s a disturbing statement (my bold):
The weak cyclical recoveries of the labor force participation rate of prime-age men are related to a secular decline. Labor force participation among prime-age men has fallen for two main reasons: increased access to Social Security disability benefits and decreased demand for less-skilled workers (Autor and Duggan 2003). These two factors are related. Decreased demand for less-skilled workers has driven down relative wages of high school dropouts. That in turn has increased the extent to which disability benefits are able to replace earned income. Almost 4.5% of the adult male population is receiving disability benefits in 2010. Those who enter the disability benefit system generally exit the labor force permanently and don’t return when economic conditions improve. The number of disability insurance applications has increased by 26.4% over the past two years, suggesting that many prime-age men who recently left the labor force may never come back.
This is a benefit of unemployment insurance that Till Marco von Wachter recently made at an excellent panel on unemployment insurance at EPI (we covered Raj Chetty’s portion of that conference here). It does increase unemployment rate, but the practical effect of that is that it encourages people to still seek work instead of drifting off into the out of the labor force population and becoming detached from the functioning labor markets.
How are older workers doing in a period in which our nation’s elites are assuming that they are having excellent matching and labor market outcomes working until 70?
In the case of the labor force participation rate of older workers, secular trends generally overwhelm cyclical patterns. Labor force participation of workers 55 and over consistently fell from the 1950s through the 1990s, when Social Security, pension, and retiree health benefits increased substantially and conditions were generally favorable for early retirement. However, in the 1990s, as the value of those retirement programs eroded, older workers reversed the downward trend. Since then, their labor force participation rate has risen steadily, even through cyclical downturns. Even though their unemployment rate more than doubled over the past three years, older workers have generally stayed in or entered the labor force….The upward trend may continue in the near future. The trends in retirement and health benefits will probably remain in place and the recession’s severe shock to wealth will likely compel even greater numbers of retirement-age workers to stay in the labor force (Daly, Hobijn, Kwok 2009).
Remember “labor force participation” is the unemployed and the employed together. So staying in the labor force doesn’t mean working. And notice the bold again; althought older workers’ unemployment rate has more than doubled more older workers are staying in the labor force. This will continue because of “trends in retirement and health benefits.” Which is to say that they are more likely to be looking for work lately even though they seem, on a first cut, to have harder labor market matching and outcomes.
And heh. Yes, “trends in retirement and health benefits”, if you read earlier, means Social Security, pension and retiree benefits have eroded in value and older workers are desperate to find work even if it means futile and incredibly long-duration unemployment searches. And the next “trends in retirement benefits” may be the move to cut Social Security benefits and raise the retirement age unless people let their voices be heard.