Prompted by a jobs report showing that 496,000 people left the workforce in March, the economic blogosphere erupted earlier this week in a debate over why so many Americans have stopped looking for work since the start of the Great Recession. Is it a symptom of the weak job market? Or is it just a sign of baby boomers starting to retire en masse?
Economists agree that demographics account for some of the decline in the number of Americans in the labor force but not for all of the 6.7 million people who have stopped working since late 2007. Roughly 3 million to 5 million workers have dropped out because they could not find jobs, economists estimate. These are not people who collect unemployment insurance and send out résumés in search of their next gig. These are Americans who—at least temporarily—have exited the workforce altogether. New research from Goldman Sachs and a paper by two Federal Reserve Board economists argue that the majority of workers simply got frustrated over the lack of jobs.
There's no consensus yet on who these people are, why they left, and if they'll try again to find work. But the answers to these questions about the so-called missing workers will have political and policy implications over the next decade for the federal budget and the economy as a whole. "The size of the pool there and the gap between the potential labor force and the actual working force represents a huge loss of potential productivity," says Heidi Shierholz, an economist at the Economic Policy Institute, a left-leaning think tank.
If these workers do not return to the labor market, it will lower potential tax revenue and likely increase the numbers relying on government benefits such as food stamps and disability insurance. "One of the biggest problems we face with the baby-boomer bulge in retirement is having enough workers behind them to pay their bills," notes Harry Holzer, a professor at Georgetown University's Public Policy Institute.
Worst of all, we may not know the answer to the mystery of the missing workers until 2017. That's when the Congressional Budget Office estimates that unemployment will dip to 5.5 percent and the labor market will become healthier again. (A well-functioning economy typically has an employment rate of 5 percent.) Only then will economists be able to gauge if people left the workforce temporarily because of the downturn in the economy, or if they're gone for good because the economy has fundamentally changed.
But, first, let's start with the facts we know: Since the start of 2007, the percentage of Americans in the labor market has dropped from 66.4 percent to 63.3 percent, the lowest level since 1979. In the 1970s and '80s, the ranks of working Americans grew because of the dramatic increase in the number of women holding jobs outside the home. The percentage of Americans in the labor market peaked in the late 1990s with the booming Clinton-era economy. Remember all of the exuberance before the tech bubble burst? Since then, the labor-force participation rate—as it's called in wonkspeak—has been on a gradual decline. A decade from now, it will probably be even lower than it is now. "As the population ages, people are reaching the time when you would expect some of them to retire," says Paul Ashworth, the chief U.S. economist for research firm Capital Economics.
The idea of missing workers took hold last month when the March jobs report showed that 496,000 people left the job market, even as the unemployment rate remained high but steady at 7.6 percent. Economists have not yet done any precise calculations on the way missing workers hinder future economic growth, such as a potential knock to gross domestic product. Anecdotally, researchers such as Shierholz argue that people who drop out of the workforce inevitably are less productive and less likely to maximize their earning potential over their lifetimes.
The missing-worker concept also has policy implications for the Federal Reserve Board as it tries to manage the jobs crisis. If these workers flood back into the job market in the coming years, it could keep wages stagnant for a longer period of time. But if they don't, and fewer workers are competing for positions, then wages may rise. "To be honest, the Fed doesn't know this yet either. The acid test in this cyclical-versus-structural debate is what happens with wage growth," Ashworth says.
None of this even touches on the budget implications. People who do not work often lean much more heavily on government services. The number of Americans collecting food stamps has increased 70 percent since the beginning of the Great Recession, hitting a record 47.8 million people last December and showing few signs of abating. A similar spike has occurred in enrollments for Social Security disability payments.
Tax collection also took a hit during the recession. Individual income-tax receipts fell from $1.1 trillion in 2007 to about $898 billion in 2010. That revenue is starting to creep up again and should exceed 2007 levels because of the recovering economy and the fiscal-cliff deal that raised income-tax rates for the wealthy. Imagine how much further tax receipts would increase if more people held jobs.
That's really the crux of the debate for political leaders and policymakers. If no one attacks the jobs crisis with gusto and addresses the issue of the long-term unemployed and the missing workers, Washington is essentially consigning people to rely on government benefits, and the federal budget will carry the burden.
This scenario hints at the real underlying question. How do we want to pay for the problem of people dropping out of the labor force—through policies that spur job growth or through increased government benefits?