Monday 22 April 2013


America's Low Labor Participation Rate: Now For the Really Bad News

By J.T. Young
America's jobs figures reveal more than high unemployment, they show a declining productive capacity. Job loss remains a major U.S. problem, but the loss of productive capacity, which lies beneath it, is an even greater and longer-term problem. And unlike unemployment, it is something the vagary of statistics cannot long hide.
March's jobs report showed a curious anomaly: low job growth (just 88,000), yet a fall in the unemployment rate from 7.7% to 7.6%. The reason such a push-me-pull-you result could occur was a fall in labor force participation by 663,000 and in the participation rate from 63.5% to 63.3%.
Looking askance at this interaction is not looking a gift horse - job creation and unemployment's rate fall - in the mouth. It is about asking a fundamental question: How long is the continuing decline in America's productive capacity sustainable?
To understand the increasing number of nonparticipants' impact is having to consider the following. Nonparticipants now number 89,967,000. That is slightly more than the U.S.'s employed total in 1976. At 63.3%, the labor force participation rate is at its lowest level since May of 1979, and that means there are less than two workers for each nonparticipant. When America last saw such rates, it was when the participation rate was growing - not shrinking.
Put into context: in December, 2007, when the recession was just beginning, the labor force participation rate was 66% and the unemployment rate was 5%. If today's labor force participation rate matched 2007's, today's unemployment rate would be 11.4% - 50% higher than today's and over twice 2007's. The highest unemployment rate in the recent recession was 10% (in October, 2009) and in BLS's records (going back to 1947), 10.8% (in December, 1982).
However these dismal statistics still fail to communicate the true scope of America's productivity loss. Adding the 11,742,000 million unemployed to the nonparticipants yields 101,709,000 eligible, but not in the workforce. America did not have annual employment reach that total until 1984. Today, it means we have an employment population ratio of just 58.5% - less than six out of ten eligible are working. If maintained as an annual total, that would be the lowest since 1947.
Much has been made of a dichotomy between "makers and takers." However this is too basic and does not capture the true economic complexity. The real relationship is not an either-or one, it is one of consumers and producers.
We are all consumers - we must do so to survive. However as basic as consumption is, it is secondary to production. Without production, there is no consumption.
The problem is, that despite production's essential role in this most basic economic equation, while all are consumers, all are not producers. Of course, not all can be. Yet for all to not be, it means producers must willingly produce surpluses. And the higher the ratio of consumers to producers, the greater the producers' surplus production must be. Again, there is no other way.
And there is one final wrinkle: producers in a free society must do their part voluntarily. Unless we are talking about slavery or communism, even where the state taxes away a part of production - even a large part - the producers produce without coercion. They must be willing to play their role.
Such a system of willing surplus production becomes increasingly threatened when an increasingly large number of eligible workers are not working. It is impossible to see how such a system would not be greatly more productive if more of its consumers were not also producers.
America's employment statistics raise serious questions as to how long producers will be motivated to produce if they too can see circumstances where they too could consume without producing.
If consumption can take place without it - as is evidently happening in our economy and at a greater rate than seen in decades - the remaining more marginal producers will have even greater incentive to not produce. Is the increasing level of nonparticipants evidence of this?
Also, why is a producer motivated to continue producing increasing surpluses, if an increasing amount of those are taken in the form of taxes - as our tax system is doing, and as many are proposing it do to an even greater degree?
The answers are no more appealing than the questions. Either eligible workers are opting out, or being driven out...or both.
Our economic problems threaten to extend well beyond employment statistics and into the fundamentals of America's economic system itself. Is it no longer simply about employed and unemployed, but about the consumer and producer relationship itself? If so, it will be far harder, and take far longer, to fix than many currently understand.
J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004, and as a congressional staff member from 1987 to 2000.

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