In Jobs Recovery, Shrunken Labor Force Can Only Rebound So Much

Even if all discouraged workers get back to work, the labor force participation rate can only go so high.

Job seekers wait in a line at a job fair in Southfield, Mich., on June 15, 2011.
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Friday the government reported the jobless rate has hit a five-year low, at 7.0 percent for the month of November. That's an encouraging sign, but it's also in part because after the recession people left the labor force in droves. Many of those people aren't coming back, but it's not entirely because of a bad job market, and it raises questions of what a full recovery will look like.

Before explaining, first a couple of definitions: to be considered unemployed, a person must be actively looking for work. And to be in the labor force, a person has to be actively looking for work or employed. That means that when the unemployment rate ticks downward, economists look at the labor force participation rate to keep the jobless rate honest – that downward tick might be because people actually found the jobs they were looking for, because people threw up their hands and gave up looking, or because they left the labor force for some other reason.

The labor force participation rate has fallen sharply in the years since the recession, which is shaded gray in the graph below. Before the downturn, more than 66 percent of working-age Americans were in the labor force. Today, only 63 percent are.

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The declining labor force participation rate has caused all sorts of worry, as journalists, pundits, and economists fear the figure shows Americans have given up. And indeed, the number of discouraged workers is currently at 762,000, roughly double where it was pre-recession. However, the recovery has also coincided with the start of a massive demographic shift that is pulling people out of the labor force: baby boomers hitting retirement age.

"Slightly more than half the decline that has occurred in the labor force participation rate since 2007 would have occurred even if we had remained at full employment every single month," says Gary Burtless, senior fellow in economic studies at the Brookings Institution. "The reason for that is the baby boom generation is just so huge because it is the generation reaching labor force exit age. You would expect a decline."

Throughout most of 2007, the participation rate was at or above 66 percent. Today, it's 63 percent. If Burtless is right, the rate today would therefore be somewhere around 64.5 percent, even without the job slump. What that would mean is that the labor force has a much shorter distance to travel to recovery than it may look.

Then again, it's important to note that the exodus of baby boomers is not entirely because boomers are happily sailing off into the sunset. Some who were laid off during the recession gave up trying and are essentially retiring against their wills.

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In the years to come, more and more baby boomers will exit the labor force – the oldest are only 67 now, and the youngest are around 50, which could continue to pull the participation rate even lower.

That's what the trend might look like in the years to come, but another force may also be pulling the labor force figure downward right now.

"There's a large decline in the number of people on extended unemployment benefits," explains Joel Naroff, president of Naroff Economic Advisors. "Those are people who were being carried in the labor force and on the unemployment rolls artificially because of the extended benefits," he explains, as people must be actively looking for work to receive benefits. As extended benefits continue to run out, some of those people may stop looking for work altogether. And if Congress decides not to extend unemployment benefits at the end of the year, it may mean many more people dropping out of the labor force, getting rid of those people "artificially" on the unemployment rolls.

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"If Congress does not act, 1.3 million people will lose their unemployment benefits in one fell swoop, and according to my theory a lot of those 1.3 million people will actually stop looking for work" because they've already been trying for so long, says Burtless.