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The Case of the Disappearing Labor Force

March 27, 2014

Dissappearing Labor Force

by Jeff Pinkerton

Now that we are nearly 5 years removed from the end of the great recession, we can see the economy starting to return to normal. But one big question remains: what happened to the labor force? Ben Casselman posted an excellent synopsis of the labor force question on the newly expanded FiveThirtyEight blog. (A quick aside — FiveThirtyEight is quickly becoming one of my daily “must read” websites. Where else can you get thoughtful analysis on the labor force and the NCAA basketball tournament in one place?)

In summary, the labor force story is this: just 62.8 percent of the adult population in the U.S. is currently in the labor force — currently working or actively looking for work. This is down from 66 percent at the end of 2007, when the recession began. In fact, 62.8 is the lowest labor force participation rate since the 1970s. If today’s labor force were at the pre-recession participation rate of 66 percent, we would have an additional 8 million more people in the labor force nationwide. So where did they go?

This question is difficult to answer because we have a couple of unique factors affecting the labor force today.

Demographics is Destiny

The first factor has to do with demographics. The great recession just happened to coincide with the oldest of the baby boomer generation reaching retirement age. We could have expected that to cause a drop in the labor force simply because more people are retiring. According to Casselman’s analysis, retiring baby boomers alone would have caused the labor force to decline by 3.2 million — regardless of how well (or poorly) the economy was doing.

An additional 1.8 million people are estimated to have left the labor force because they are now receiving disability benefits.

We are Doing More with Less

The second factor is purely economic. During the recession, businesses had to do more with less, and either by working harder or using more technology, they did just that. Productivity soared. Fewer workers were producing more and more. Businesses simply did not need as many employees. As a result, more and more people simply gave up looking for work and dropped out of the labor force. The remaining 3 million “missing” workers may have returned to (or remained in) school, or they may be living off of savings. Either way they are not actively in the workforce now, but might return if jobs become more plentiful.

Kansas City’s Story

Kansas City’s labor force makes up 0.7 percent of the national labor force, so we can estimate that there about 27,000 people in the Kansas City would re-enter the workforce if more jobs were available. Considering the fact that the Kansas City metro added just 9,000 net jobs in 2013, it will take a while to absorb this backlog unless the pace of employment growth increases significantly.

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