More than 94.2 million people in the United States have neither worked nor looked for a job in the past year. That’s not including anyone under the age of 16.
While I don’t think this is the doomsday crisis some pundits seem to fear it is, I do believe it’s a problem which we need to address to improve prosperity for individuals, families, and society as a whole.
As noted in a prior column, the labor force participation rate (simply the proportion of the civilian labor force either employed or unemployed, but looking) has been falling for years. Currently, the percentage stands at 62.6 percent, according to December 2015 data from the U.S. Bureau of Labor Statistics (BLS). With a large and growing percentage of the population not working, there is more pressure on those who do have jobs to generate output, income, and tax receipts. Over time, the situation could become untenable, and our standard of living could be affected.
The crucial question is why fewer Americans are working. Slow hiring during the recession and ongoing scarcity of good jobs in many fields and geographic areas is part of the explanation, but only part. In fact, the participation rate continued to drop even after the recession ended. Another component of the answer is that our population is aging, with the large baby boom generation moving into age brackets where work is typically less common and ultimately reaching retirement age (at a pace of about 10,000 per day).
The BLS has analyzed the reasons people are not working, comparing reasons given in response to a survey in 2004 to responses in 2014. As of 2014, the total non-working population (age 16 and older) in the United States stood at 87.4 million, which was 35.0 percent of the total population (16 or older). Of that 35.0 percent, the most common reason given for being out of the labor force was retirement (15.4 percent), followed by being ill or disabled (6.5 percent), going to school (6.4 percent), home responsibilities (5.4 percent), and other reasons (the remaining 1.2 percent). The tiny “other reasons” category includes those who responded that they could not find work.
The 2014 results were compared to 2004, when a significantly lower 31.3 percent of the population was not in the labor force. The percentages not in the labor force due to retirement had the largest gain over the period, which fits with the aging of the baby boom generation. The second-largest gain was in the percentage who said they weren’t working because they were going to school, which was particularly common in the 16-19 and 20-24 year age ranges (although data on enrollment doesn’t exactly support the validity of this answer). The proportion who indicated they were not working due to illness or disability increased (from 5.5 percent to 6.5 percent). The percentage citing home responsibilities as the reason for not working was the only category that decreased.
In addition to variation by age, the results differed significantly with education level. In the prime working age group (25 to 54), those with less education were less likely to be part of the labor force. In 2014, the BLS found that 21.2 percent of men with less than a high school diploma did not participate in the labor force, compared with 14.9 percent of high school graduates, 10.7 percent for those with some college or an associate’s degree, and 5.6 percent of college graduates. For women, the pattern was similar, with 49.6 percent of those with less than a high school diploma not in the labor force, compared with 15.4 percent of college-educated women.
The correlation between education and unemployment is well documented, with additional education linked to lower unemployment rates (as well as more income). The incentives to stay in the labor force are generally superior with higher levels of education: better salary and benefits and often more rewarding jobs.
Over time, falling labor force participation rates could erode standards of living. In addition to incentives for work and other actions to better prepare workers for jobs, there is room for improvement in the structure of social services programs. While safety nets are clearly necessary and serve an essential and valuable purpose, at times they can become more of a trap for recipients than a temporary source of relief. When there is a financial disincentive to work because of the potential for lost benefits, there will be some who choose to stay out of the labor force for longer periods of time. The fact that disability and illness are more common reasons given for not working could point to issues in the way these programs are structured. The bottom line is that the longer an individual goes without working, the greater the likelihood of opting out of the workforce entirely.
The edging down of the labor force participation rate is not unduly alarming in and of itself. With productivity gains, we can now produce more with fewer workers, and it’s not all bad that people can retire earlier or not work in order to obtain more education. However, if people retire early because they give up on finding a decent job, that’s a problem. Similarly, while young people are increasingly responding to surveys that they are not working in order to go to school, the data indicates that only some of them are actually enrolled. All in all, there is reason to believe that the trend we are observing is driven, at least in part, by underlying issues with the incentive structure of the current job market. This pattern is worthy of consideration to see what could be tweaked to encourage more people into the workforce, thus increasing economic potential and providing more flexibility to deal with emerging demographics.