Why So Few People Are “Marginally Attached” to the Labor Force – Real Time Economics

Economists attempting to dissect the U.S. labor market in recent years have been perplexed by the number of people leaving the labor force entirely. In a little over a decade, the number of people either working or actively looking for work has declined to 62.8% from 67.3%. The decline started in 2000 and has accelerated since the recession began in 2007. The question for economists: will these people return if the economy strengthens?

Recently the White House Council of Economic Advisers weighed in on this debate. They argued that slightly more than half of the decline of the labor force is due to the aging of the population. And aging clearly has a role. More and more of the Baby Boomer generation, born after World War II, are reaching their 60s (the oldest Boomers are nearly 70) and retiring.

But many economists believe the decline in labor force participation is about more than retirements. Many workers, they say, are simply giving up on the labor market in frustration because the economy has been weak for so long.

The Department of Labor’s definitions of unemployment are critical for understanding this debate.

The headline unemployment rate, which rose to 6.2% in today’s report, tells only part of the story because it defines as unemployed only those people who have searched for work in the past 4 weeks. Beyond that may be a “shadow labor force” of people who want to work but have given up.

It’s not the case, however, that it never occurred to the Labor Department to ask about this.

The Labor Department also publishes alternative measures of labor underutilization, one of which is particularly relevant here, the so-called U-5 unemployment rate. (The main unemployment rate is known as U-3.) In addition to the standard unemployed, the U-5 rate includes people who want to work, are available to work, but have stopped actively searching for work. These workers are known as the “discouraged and marginally attached.” If they’re considered unemployed, the jobless rate would be even higher.

In July, the U-5 rate was 7.5%, suggesting that focusing on the 6.2% rate has missed part of the story. But, ever since the measure has been compiled (unfortunately, only since 1994), some share of the population has always been marginally attached. It’s not the case that in a strong economy, all of these workers flood back into the labor force. In fact, the share of the marginally attached is only somewhat higher today than during a strong economy.

The Labor Department compiles another rate, known as U-6, which includes the unemployed, the marginally attached and people who have part-time jobs but would like full-time work. This latter group is not, strictly speaking, unemployed. They have jobs but not the hours that they need, and thus are underemployed. At 12.2% this measure remains highly elevated, suggesting a still-weak labor market.

Breaking the U-6 down into its three components shows that 1.3% are marginally attached, 6.2% are unemployed and 4.7% are part-time for economic reasons (part-timers who say they don’t want full-time work are not considered in these measures). The unemployed are still one or two percentage points higher than in healthier economies. The part-timers are two or three percentage points higher and their ranks have declined very slowly in the recovery. But the discouraged and marginally attached workers are only somewhat elevated, about 0.3 or 0.4 percentage points higher than in a healthier economy.

This is a puzzle for those who believe there still remain vast numbers of labor force dropouts that would flood back into the economy if it were stronger.

A few explanations have been offered. An elevated number of people may have seen the weak economy and decided to remain in school for longer, a phenomenon known as “sheltering in school,” which increases during weak economies and may still be elevated. Some people may have given up on the labor market, but elude formal classification as marginally attached because they have done nothing to look for work in more than a year. Given the persistence of long-term unemployment, this may be more common now than in the past. (Conversely, many may have dropped out for economic reasons but won’t be enticed back.)

Some may desire to work again someday, but are not available now because they’ve decided to care for a family member or take on volunteering. Some may even happily be on the sidelines, not even wanting to work, but if the labor market really got hot and exciting they’d decide to pursue jobs again. Some people are unable to accurately explain their preferences to surveyors. Sure.

Many people are unemployed. Many people have part-time jobs but want full-time work. These are direct signs of “underutilization” in the labor market. But the most obvious candidates for an additional “shadow labor force”–the marginally attached who say they want to work and have looked for work at least once in the past year–is simply not that large.

Related coverage:

Jobs Report: U.S. Employers Add 209,000 Positions

July’s Employment Report: By The Numbers

Five Takeaways from the July Jobs Report

WSJ’s Hilsenrath: Fed Can Remain Patient on Rate-Hike Debate After Data

Economists React to July’s Jobs Report: ‘Not Weak, But…’

Twitter Takes on the Jobs Report 



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1 August 2014 | 5:02 pm – Source: blogs.wsj.com

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