In June 2015, employers added 223,000 jobs and the unemployment rate fell from 5.5 percent to 5.3 percent — the lowest rate since April 2008. In July, employers added another 215,000 jobs, but the unemployment rate stayed at 5.3 percent. Why would adding about the same number of jobs lower the unemployment in June but not in July? The primary reason: 432,000 people dropped out of the labor force in June and a much smaller number in July.

One of the unexplained phenomena of the six-year economic recovery and expansion has been millions of people dropping out of the labor force. The Bureau of Labor Statistics (BLS) has been tracking the labor-force participation rate since 1975. BLS tracks the number of workers eligible to work, including all those 16 years and older who are not in the military and not institutionalized, mostly those in jail or prisons.

In July, the BLS reported that 93,770,000 Americans were not in the labor force or wanting to be in the labor force as the participation rate was at 62.6 percent, a 38-year low. There were 58.6 million Americans not in the labor force in 1975 when the BLS began keeping records, 80 million in 2008, 90 million in July 2013, and 93.8 million today.

It is estimated there are 250.9 million in the civilian population 16 years and older, not in the military or in institutions. Of those, 157.1 million participated in the labor force by either holding a job or actively seeking one, of which 148.7 million were employed. This is how the labor participation rate of 62.6 percent is calculated.

At the end of 2007, the participation rate was 67 percent. If the participation rate was still 67 percent, there would be 168 million Americans working or seeing work — about 11 million more than today. The question is why aren’t those 11 million working or seeking work?

Getting the missing workers back into the economy is essential for U.S. long-term economic growth.

Part of the question may seem obvious: people are retiring, especially the Baby Boomers — the 75 million born between 1946 and 1964. Every day, about 10,000 Baby Boomers turn 65 years old. While the absolute number of Americans over 65 who have retired has increased, the labor-force participation rate of those 65 or older has actually increased.

The participation rate for those ages 55-64 has also increased, driven almost exclusively by the increased labor-force participation of women. Those retiring after age 55 can account for 2-3 million of the 11 million missing workers.

Another logical explanation of the lower labor-force participation rate is the larger number of those aged 16-25 who are in college or training programs. This is part of the Generation Y or Millennial Generation, those born between 1980 and 2000, which is larger in absolute numbers than the Baby Boomers.

According to the Organization for Economic Cooperation and Development (OECD), the percentage of the U.S. population in that age group not in education, training or employed has increased from 12 percent in 2007 to 15 percent at the end of 2014. So there are more than 1 million younger people who are not working, seeking work or getting an education. They are discouraged about job prospects and have dropped out of the labor force.

The prime working age is 25-54 and that is the core of the U.S. workforce. In July, 77.1 percent of this group was employed, better than the 75 percent employed at the bottom of the labor force in 2010. However, it is still 2.8 percent lower than the 79.9 percent prime-age employment rate of December 2007.

While the Great Recession was harder on prime-age men than women, the recovery rate was better for men than women. Still there are 3 percent fewer prime-age males working today than in December 2007 and 2.2 percent fewer prime-age women.

While many in the age group are undoubtedly also seeking employment if not working, it appears that this may be more structural than cyclical. In 2000 the employment rate for workers aged 25-54 was 81.6 percent up from 72.5 percent in 1982, but has since fallen to 77.1 percent, so there are several million Americans in the prime working age of 25-54 not working or seeking work.

If college and retirement can’t explain the millions of workers who have dropped out of the labor force, what can? Government programs and incentives can explain part of the missing workers.

In The Spotlight

There are 11 million people in the U.S. who receive Social Security disability benefits today versus 5 million in 2000. While not all of these people are of prime working age, the majority are, so this accounts for many of the workers missing from the labor force.

Other programs such as the Affordable Care Act also have provided disincentives to work as insurance is now available to those not working or seeking work. Food stamp recipients are also at an all-time high — 30 million more than in 2000 — and some of the missing workers may be subsisting on this entitlement program.

The U.S. was supposed to become a cashless society. But the amount of cash in the U.S. economy has grown to $1.4 trillion today, 2.6 times the amount of cash in the economy in 2000. Cash has grown much faster than either GDP or the population. This suggests a growing underground economy has evolved to be worth an estimated $2 trillion

Given 120 million households in the U.S., this underground economy works out to more than $16,000 per household. Many workers exist in this $2 trillion cash-based economy and avoid taxation, government regulations or being accounted for in the labor force.

Education, retirement and disability can account for about half of the 11 million potential workers. The other half are missing in action. If not, the unemployment rate would be higher than 5.3 percent. Adding just part-time workers who want to work full time to the unemployed takes the rate, known as U6, to 10.4 percent. Adding those who have dropped out of the labor force would take the unemployment rate much higher.

This missing workers phenomenon seems to be basically a U.S. issue. Since 2000, America’s labor-force participation rate has declined more than in any other developed country, even though the U.S. economy has fared better. And the U.S. is one of only three countries out of 38 developed countries with a declining labor-force participation rate.

In the longer term it is important to get the participation rate up because growth of real GDP is a function of growth in number of workers and growth in real output per worker.

For the decade 2005-2014, the annual growth of the working-age population, 16-64, was only 0.7 percent. This was one of the reasons for the subpar economic growth of 1.8 percent annually in that decade. The BLS forecasts the growth of the working-age population to be 0.4 percent annually in the 2015-2024 decade.

Getting the missing workers back into the economy is essential for U.S. long-term economic growth. If a declining work force is not enough of a problem, productivity growth per worker as well as wage growth are also at multi-year lows. But that is another story.

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Robert Klemkosky
About The Author Robert Klemkosky
Robert C. Klemkosky is professor emeritus of finance at Indiana University Kelley School of Business. He was the founding dean of SKK Graduate School of Business at Sungkyunkwan University in Seoul, a top MBA program in Asia, and currently is chief investment strategist at Wallington Asset Management, an Indianapolis-based money management firm.




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