THE MYSTERY OF THE SHRINKING U.S. LABOR FORCE
January 1, 2013
Despite a historically slow pace of job creation coming out of the latest recession, theunemployment rate has steadily declined from its peak levels. A big reason for this is thathundreds of thousands of people have left the labor force and are no longer counted aslooking for work.
This is a complicated picture that includes “discouraged workers” and others who have
sought out an expanding social safety net of unemployment and disability payments. Butthere is also a mix of longstanding demographic factors and macroeconomic conditions thatis shaping labor force participation.
Because labor force participation rates are falling, fewer new jobs will be needed in the futureversus historical trends to keep the unemployment rate from growing. That is notnecessarily a happy story. Furthermore, the quality of those new jobs will determine whether
there will be a “lost generation” of workers who struggle to increase their human capital and
real standard of living.
The two drivers of GDP growth are increases in the labor force and productivity gains.Current trends in these regards point to slower GDP growth over time. However, the goodnews is that as investors we are not constrained to our home economy, but haveopportunities in foreign companies and global franchises based here that should continue tobenefit from more rapidly growing labor forces around the world.
Through much of 2012 the monthly Labor Department report on employment told a similar story. An averageof 151,000 new jobs were created each month, a pace that was well below previous recoveries and alsobelow the historical number needed to provide enough jobs to keep up with the expanding population. Yet
month after month the unemployment rate fell, defying most observers’ expectations and intuition. Every
month the story was the same. Enough people had dropped out of the labor force so that the percentageunemployed of those working and actively looking for work declined.Labor force participation measures the percentage of people 16 or older who consider themselves workingor looking for work. Everyone else is considered
out of the labor force. The path of thispercentage since World War II is shown below.
Source: U.S. Bureau of Labor Statistics
Labor Force Participation 1948-2012