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Aging population, weak economy drive decline in labor force

Economists say downward trend is unlikely to reverse

Four and a half years after the official end of the Great Recession, Americans are still leaving the labor force in droves.

In December, the number of people counted as employed or looking for work fell by 347,000, which is why the unemployment rate fell to 6.7 percent despite anemic job growth.

The labor force participation rate, a measure of how many adult Americans either have a job or want one, fell to 62.8 percent, a 36-year low. At the end of 2007, as the recession began, it was 66 percent.

That may not sound like a lot, but it amounts to 7.9 million fewer participants in the labor market. If they were all still looking for work, the unemployment rate would still be above 10 percent.

That’s an overly simplistic analysis, though.

The U.S. population is graying, and folks are less likely to work when they hit their 60s and 70s. Depending on which study you want to believe, changing demographics explain at least one-fourth — and perhaps as much as two-thirds — of the decline in workforce participation.

At the same time their elders are giving up work, a higher percentage of young people are postponing work by staying in school. That may be because they know jobs are hard to find, but it also may be because the modern job market places an ever-bigger premium on education.

People who left the workforce often get described as discouraged workers, but Christopher Waller, director of research at the St. Louis Federal Reserve Bank, doesn’t like that term. The number of people who simply gave up a job search is small, he says, relative to the growing ranks of retirees and students.

“Discouraged workers have always existed, but from all the evidence we can find it’s still a very tiny number,” Waller said.

One place where workforce dropouts are showing up is on the disability rolls. The number of people collecting Social Security disability checks is up by 1.8 million since 2007.

“There’s a lot of evidence that applications for disability insurance are substituting for unemployment in many cases,” says James Sherk, a senior policy analyst at the Heritage Foundation. “The huge problem with this is that once people go on disability insurance, they basically never come back.”

In fact, economists say most of the decline in labor-force participation looks like a permanent change, or at least a long-lived one. Joel Prakken, chairman of Macroeconomic Advisers, says a bit more than half of the decline is because of demographic and structural factors.

“The structural part is relatively easy to forecast, and that part of it is going to keep growing,” he says. “The issue is how quickly the cyclical portion will recover. Over the next couple of years, we essentially are forecasting an unchanged participation rate.”

In other words, even if an improving economy tempts some discouraged workers back into the job market — or persuades some students to take a job instead of pursuing graduate school — the number of retired baby boomers is likely to keep rising.

With any luck, the weak December jobs number will prove to be an aberration. The economy created just 74,000 jobs last month, down from an average of 200,000 in the previous 12 months.

Even the higher number was just enough to keep up with population growth. Unless the job market somehow accelerates dramatically, folks who have dropped out of the labor force are highly unlikely to be dropping back in.

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