Thursday, March 8, 2012 –
Jobless rate slides as workforce shrinks from exiting boomers
By Kevin G. Hall
WASHINGTON — New research challenges the conventional wisdom that the unemployment rate is falling because workers have given up the job hunt and exited the labor force, and the rate likely will climb again once these discouraged Americans renew their search.
In a March 1 report, “Dispelling an Urban Legend,” economist Dean Maki at Barclays Capital, part of the British financial giant Barclays, argued that the size of the U.S. work force is shrinking as aging baby boomers hit retirement age amid a sluggish economy. This — not the so-called missing workers from the labor force — may be knocking down the jobless rate faster than expected.
“Based on our reading of the evidence, the conventional view that in recoveries the unemployment rate will stop falling and even start to rise because of surging labor-force participation rates amounts to something of an urban legend,” Maki and his colleagues concluded. “Such an event has not happened in the past, and we do not believe it will this time either.”
Maki’s findings are not necessarily a great development, because implicit in a shrinking labor force is slower economic growth. Barclays Capital expects sluggish growth in the range of 2.5 percent this year and next.
In an interview, Maki said he expects the unemployment rate to keep falling this year, to about 7.8 percent. Next year the rate would fall to about 7 percent, according to his projections. That’s considerably better than the Federal Reserve Board’s January central tendency forecast, which put the unemployment rate at the end of this year between 8.2 percent and 8.5 percent, and next year between 7.4 percent and 8.1 percent.
“Really what this (study) is saying is, it is a lot easier to push the unemployment rate down than it used to be,” said Maki.
That’s because demographics are at play, he said, and not the so-called missing workers who have vanished from the labor force.
The Republican National Committee issued a Feb. 6 research note on “The Missing Worker,” dismissing the falling unemployment rate as a phenomenon explained by workers who have exited the labor market, giving up on their job prospects.
During the economic expansion from 2003 to late 2007, the workforce participation rate was about 66 percent. It fell amid the recession and has been trending around 64 percent.
That has led to the view that the dynamics will change when workers who exited the labor market feel confident enough to start looking for work again.
But Maki thinks the onslaught of retiring boomers — Americans born between 1946 and 1964 — will continue to pull down the labor-force participation rate even as discouraged workers resume looking for jobs.
The crux of his argument is that the labor force is growing more slowly, and that by itself is holding the jobless rate down.
Barclays’ research found, in fact, that unemployed re-entrants to the workforce as a share of the labor force stood at 2.2 percent in January 2012, compared with 1.3 percent in August 2007, months before the December start of the Great Recession.
That means re-entrants to the workforce are already twice that of pre-recession levels, and yet the unemployment rate has fallen from a high of 10 percent in October 2009 to 8.3 percent in January 2012.
The Barclays Capital research projected long-run economic growth around 2 percent, below historical trends and also below the Fed’s long-run central-tendency forecast of long-term growth between 2.3 and 2.6 percent.
As a mature, advanced economy, U.S. growth rates tend to be far slower than up-and-coming economies such as China, India and Brazil. But slowing below historical trends carries all sorts of implications.
“That’s not a good thing, thinking about long-term budgets,” Maki said, suggesting the trend will strain federal tax revenues, thus heightening problems with deficits and debt. It also suggests strains on federal health and retirement programs such as Medicare and Social Security.
“This is the world we’re in now, and it’s best to fully understand these changes that are happening,” Maki said.
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