Barron's Cover: "Work's for Squares"

From Barron's:

The unemployment rate may be falling, but with more people than ever out of the workforce, the news is bad and getting worse.

The job market has made a 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 the U.S., with worrisome consequences for economic growth. 

While the unemployment rate slipped to 6.1% in June -- 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.

No one in government is facing up to the severity of the problem. In her recent talk at the Jackson Hole Economic Policy Symposium, Federal Reserve Chair Janet Yellen posed the question of whether weak labor-force participation is due to cyclical factors that will pass with a stronger expansion or to structural factors likely to endure. She offered no sure answer.

Illo: Scott Pollack for Barron's

Barron's will answer that question for her. The problem increasingly appears to be structural. Following the devastating recession of 2008-09, the "jobless recovery" drove many workers out of the labor force, as often happens when the economy is in a downward cycle and then struggles to recover. But now that the expansion is starting its sixth year, the rebound in the job market is beginning to make the decline in participation look anomalous and therefore likely to persist. 

The share of the adult population, 16 and over, participating in the labor force is at its lowest level since 1978, at 62.8% and 62.9% in June and July, respectively. In a comprehensive study of trends in the workforce released in December, the Bureau of Labor Statistics said it expects a further decline in labor-force participation, to 61.6%, by 2022.

The BLS study provides an indispensable framework, essentially asking whether the retiring baby boomers will be replaced in sufficient numbers by younger cohorts. The agency's conclusion is not reassuring.

Indeed, a closer look suggests that the problem is far worse than the BLS supposes. There are two key reasons. For starters, the study makes no mention of the surge in disability filings that has already claimed millions of dropouts from the labor force and will likely claim more. It also makes no mention of the Affordable Care Act's likely negative effects on incentives to work. The Congressional Budget Office projects that the ACA could reduce the labor force by the equivalent of more than two million full-time workers. 

Furthermore, the BLS study projected that the labor-force participation rate of prime-age men, ages 25 to 54, would fall to 88.2% by 2022, from the agency's baseline of 88.7% in 2012. But the participation rate of prime-age men has already fallen below the 2022 projected level, according to the most recent data, fluctuating at 66-year lows of 88% to 88.1% from May through July. 

Given all of this, when the BLS updates its 10-year projections, it will probably lower its estimated figure for this all-important group.

Barron's is focusing on men ages 25 to 54 as a way to track the core rate of labor-force participation, because most have finished school and are too young to retire. For other demographic groups, there are cross-currents that make the overall trend hard to interpret, but that apply far less to prime-age men. As American Enterprise Institute senior fellow Charles Murray has bluntly observed, there was a time when "healthy men in the prime of life who did not work were scorned as bums." Murray goes on to note that the "norm has softened," but has not completely faded.

WHILE THE LABOR MARKET might not be restored to perfect health, it is certainly on the rebound. The jobless rate among prime-age males in July was down to 5.1%, with the overall rate at 6.2%. New unemployment-insurance claims from May through July hit lows not seen since May-July 2007. Job openings in the second quarter of this year, as tracked by the BLS, have risen to a monthly average of 4.6 million, a high not seen since second-quarter 2007. 

All of this makes it hard to blame the continued decline of prime-age males in the job market on a lack of work opportunities, especially when their labor-force participation rate has already lost so much ground. From May through July of this year, the participation rate of prime-age males has been 88%-88.1%, down from 88.7%-88.4% in the same three months of 2013. At these 66-year lows, nearly one prime-age male out of eight -- an average of 7.3 million -- has opted out of the labor force in any given month....MUCH MORE 

Work's for Squares