Labor Force Participation Lowest in 36 Years – Why? by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 9, 2014
IN THIS ISSUE:
1. August Unemployment Report – A Big Disappointment
2. Five Reasons Why the US Jobs Recovery is a Myth
3. Labor Force Participation Rate – Cyclical or Structural?
4. “Prime-Age” Men (25-54) Dropping Out of the Workforce
5. 35.4% of Americans Receive Government Welfare Benefits
6. Potomac Fund Management WEBINAR on September 18
Last Friday’s unemployment report for August was significantly weaker than expected. While the headline unemployment rate dipped back to 6.1% (same as it was for June), the number of new jobs created last month was substantially below expectations and marked the lowest number of the year.
Until last Friday’s disappointing jobs report, most economists assumed that job growth would continue at a pace of more than 200,000 new jobs per month. But today we’ll look at five facts which suggest that such an assumption was likely misplaced.
Our main topic today focuses on the labor force participation rate – the percentage of Americans working or looking for work – which is now at a 36-year low. People are leaving the workforce in record numbers, and it’s not all because Baby Boomers are retiring. Over half of those leaving the workforce have simply given up on finding a job.
The question is whether this is a “cyclical” phenomenon that will improve when the economy gets stronger, or whether it’s a “structural” problem that will be with us for years. That’s what we’ll explore as we go along today.
August Unemployment Report – A Big Disappointment
On Friday, the Bureau of Labor Statistics (BLS) reported that the official unemployment rate for August dipped to 6.1%, down from 6.2% in July. Yet the incremental drop to the same level seen in June was because more people dropped out of the labor force than found jobs.
The worst news was that the economy created only 142,000 new jobs in August, the lowest reading of this year and substantially below the pre-report consensus of 225,000. The BLS also revised new jobs numbers for June and July with a reduction of 28,000 jobs from what was previously reported.
Given that the new jobs figure was so much lower than expectations, several analysts were quick to speculate that the BLS will revise that number higher over the next couple of months. Maybe so, but there’s no guarantee of that.
The labor force participation rate – those working or actively looking for work – was down from 62.9% in July to 62.8% in August, back to a 36-year low. I will discuss the participation rate in more detail below.
About the only bright spot in the latest jobs report was workers’ pay. Average hourly earnings gained six cents in August to $24.53, bringing the year-over-year growth rate in wages to only 2.1%, which is quite weak for this point in the recovery. The average workweek was 34.5 hours for the sixth month in a row.
All in all, the latest jobs report was quite a disappointment.
Five Reasons Why the US Jobs Recovery is a Myth
Until last Friday, many economists and politicians treated the recent six-month string of 200,000+ monthly job gains as a major achievement. More likely, it was merely a slight pickup in the pace of what has been an unusually slow recovery in the US since the recession ended in June 2009.
As noted above, unemployment edged down to 6.1% from 6.2%. That’s “good” news until you realize it fell only because more Americans stopped looking for jobs. A record 92.3 million working-age adults are now out of the workforce. It has now been 62 months since the Great Recession ended, and some clear trends are emerging. Let’s look at five realities about this recovery:
• For all recoveries since World War II, cumulative job growth has averaged 12.5%. This time, job growth is just 6.2%, the worst on record. Based on this, we would need 8.19 million more jobs just to reach “average.” That’s not a strong job recovery at all.
• The labor force shrank by 64,000 in August, pushing the participation rate to 62.8%, as it was in June. The last time it was that low, Jimmy Carter was president.
• A new report says 1-in-3 workers today is a “freelancer” – a person who is self-employed but is not committed to a particular employer long-term. There are 53 million workers without a regular full-time job to go to – temps, moonlighters, etc. Yet people who identify themselves as freelancers are counted as “employed” by the BLS.
• In August, the number of hours worked – a proxy for GDP growth – and average hourly wages both rose 2.1% from last year. That does not even keep up with inflation. Not much growth there.
• New data from the Fed show that only the top 10% of American earners have seen their incomes rise under Obama. Everyone else has taken a pay cut or seen their pay stagnate.
Despite 0% interest rates, $7 trillion in added federal debt, more than $1.5 trillion in “stimulus” spending and the Fed creating more than $4.5 trillion in new money out of thin air, our economy just stumbles along. Let’s hope voters figure this out before the November elections!
Labor Force Participation Rate – Cyclical or Structural?
The job market has made a decent comeback over the past year, but the American labor force hasn’t, and the prospects don’t look good. Work seems to be on the wane in America, with worrisome consequences for economic growth.
While the unemployment rate fell to 6.1% in August – its lowest level in six years – the percentage of adult American workers who are actually in the workforce is at its lowest level in 36 years, with no rebound in sight.
The “labor force participation rate” refers to the number of working-age people who are either employed or are actively looking for work. People who are no longer actively searching for work are not included in the participation rate. During an economic recession, many workers often get discouraged and stop looking for employment, and as a result, the participation rate decreases. For the last five years, the participation rate has fallen even though we’re in a recovery.
The participation rate is an important metric to note when looking at employment data because unemployment figures reflect the number of people who are looking for jobs but are unable to secure employment. No one in government is facing up to the severity of the problem.
In her maiden keynote speech at the Jackson Hole Economic Policy Symposium in August, Fed Chair Janet Yellen posed the question of whether weak labor force participation is due to “cyclical factors” that will pass with a stronger economy, or to “structural factors” that are likely to endure, perhaps for a long time. She offered no sure answer.
While the downward trend in recent years can be attributed in part to retiring Baby Boomers, at least half the drop is because more Americans have simply given up the job hunt and left the labor force entirely.