Does Everyone Want a Job?

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It appears that the U.S. economy is off and running as we enter the second quarter of 2017, despite the Federal Reserve’s Open Market Committee raising short term rates. STRATMOR’s clients, as has everyone else, seen rates move higher since October. Jobs are a cornerstone of the economy, and there are still some out there who believe that there are holes in the jobs situation. Since the Great Recession, the labor force participation rate—the percent of people employed or looking for work—has fallen roughly 3 percent­age points. Declining participation has downside implications for the long-run size of the economy.

 

A well-documented explanation for the decline is that the population has gotten older and, therefore, is more likely to be retired. There is no consensus on what exactly has driven the decline in partici­pation beyond what demographics can explain. Whatever the cause, it appears this decline is concentrated among those who have only a high school degree or some college education, while those with less than a high school education or a bachelor’s degree or higher are par­ticipating at a normal rate.

 

Many argue that the labor force participation rate has declined relative to 2008 by more than simply changes in age or edu­cational attainment would suggest. Understanding the makeup of these additional nonparticipants provides clues regarding which policies may put upward pressure on participation.

Male and female nonparticipants have roughly the same capacity to join or return to the workforce. This contradicts the often-heard narrative that the decline in participation for lower-skill prime-age men (age 25 to 54) is most problematic. That may still be true over a longer time span (1960s to present) but not for the recession and recovery period.

 

The findings suggest that a plau­sible policy intended to limit declining labor-force participation rates could focus on nonparticipating individuals possessing a high school or some college education, either through higher educa­tional attainment or greater participation within each category.

Many people become edu­cated precisely because they plan to work, and more highly educated individuals who have no intent to enter the labor market would not raise the participation rate.

But at least speculatively, policies that increase the population’s education level should also raise participation. For example, if a wage is so low that working would make a household worse off—pos­sibly because earnings wouldn’t cover the costs of transportation, child care, etc.—increased education should raise the market wage, increasing the likelihood of workforce entry.

 

Even if training and education don’t occur through traditional high schools and colleges, policy changes could aim to raise the par­ticipation of the middle-education catego­ries back to their 2008 age-adjusted rates.

 

Many of these middle-educated non­participants may be inclined to work but face impediments that have emerged since 2008, such as lack of proficiency in new skills employers require. A mismatch between the skills applicants have and those required is often cited as a princi­pal barrier to hiring. Implementing new vocational training and boosting exist­ing programs to reduce possible skills mismatch between nonparticipants and employers could draw people back into the workforce.

 

The Current Population Survey asks those not in the labor force (defined as those who haven’t sought work in the prior four weeks) if they want a job. Analyzing the share of these “interested nonparticipants” in the population by education group shows broadly similar patterns. The largest increases relative to 2008 were concentrated in the middle-income edu­cation groups, although the rate is slightly higher for the other education groups as well.

 

This suggests that some of the decline in participation rates was involuntary, especially for the middle-education groups. The above-normal rate of interested nonparticipants’ only accounts for about 20 percent of the unusually lower labor force participation rate for the middle-education groups. This could mean 80 percent of the missing workers are unwilling or unable to join the workforce. It might also mean that those who answer they don’t want a job implicitly incorporate current job prospects into their response, which could change with circumstances.

 

There are many different explanations for the recent fall in labor force participation and characterizations of the unexplained component. Educational attainment is one of those characterizations, because only those with a high school diploma or some college education are less likely to be in the workforce than one would have expected in 2008. This speaks to what segments of the population have most felt the lasting damage of the Great Recession. It also hints at what sort of policies might boost labor force participa­tion as the population continues to age.

 

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