Discouraged Workers

Economists Puzzle Over Labor Force Dropouts


Since the depths of the recession, more Americans are working and a steadily shrinking number are officially unemployed. That’s good! But there’s another category: People who are neither working nor unemployed. They’re just not looking for a job. That number has stayed stubbornly high. Not so good. Or is it? Economists are divided. It depends on why people aren’t working. If a lot of them have given up looking for a job because they don’t think they can get a job, that can be a sign that times are tougher than the other statistics suggest. If, on the other hand, more people are choosing to retire or staying in school longer, the outlook may be rosier. It’s not just an academic debate — the question is much on the mind of U.S. Federal Reserve officials as they ponder when to start raising interest rates.

The Situation

The share of Americans with a job or trying to find one fell steeply when the recession began and has stayed unusually low. The participation rate has stabilized between 62 and 63 percent in the last year. While that’s still the lowest level in decades, the recent steadiness may be a sign that workers are optimistic about their job prospects. The reasons the rate is low have shifted, researchers say. Soon after the downturn hit, large numbers of people felt so glum about their employment prospects that they stopped looking — becoming what economists tellingly call “discouraged workers.” Usually, that group gets back in the game pretty quickly when the job market recovers. That hasn’t happened, in the U.S. or in Europe. Maybe that’s because the recession was unusually long, the recovery unusually slow and job searches unusually daunting. There are also other factors at work, notably the aging of the baby boom generation. One U.S. Federal Reserve paper credited retirements by older workers for as much as 80 percent of the decrease in labor force participation over the past two years, and another said much of the decline in participation since 2007 is due to longer-lasting causes such as the aging of the workforce. A paper written by Fed economists for the International Monetary Fund concluded that half of the decline in workforce participation had more to do the recession than with underlying demographics.

The Background

Beginning in about 1965, labor-force participation started swelling as baby boomers started jobs, and then rose further as an increasing number of women untied their aprons and entered the workplace. The labor force participation rate peaked at 67.3 in January 2000, right as the oldest baby boomers reached their last year in the prime working ages of 25 to 54. Now, retirements are running at a far faster pace. Surveys show that more older Americans are willing to work past 65 than a decade or two ago, but that group is still a minority. And the size of the baby boom cohort means that the numbers who do retire will continue to drag down the share of Americans at work. The Bureau of Labor Statistics projects that by 2022 the labor-force participation rate will be down to 61.6 percent.

Source: U.S. Bureau of Labor Statistics
Source: U.S. Bureau of Labor Statistics

The Argument

It’s no surprise that the generation of younger workers succeeding retiring baby boomers is smaller. The question being debated is whether the new reality of a smaller workforce should change the way economists judge how strong the economy is. If shrinking workforce participation means the economy has less potential for growth than in the past — in effect, a lower speed limit — then boosting job growth by keeping interest rates near zero too long could eventually mean fueling inflation. Fed Chair Janet Yellen suggested that she believes there are still lots of workers on the sidelines, saying in September 2015 that “attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring.” Other economists wonder what might happen if that influx never arrives.

The Reference Shelf

  • Data from the Bureau of Labor Statistics on the labor force participation rate.
  • How the U.S.’s labor force participation rate compares with that of other countries.
  • Research from President Barack Obama’s Council of Economic Advisers outlining causes for the decline in labor force participation and policy implications.
  • Research from the Federal Reserve Bank of Philadelphia breaking down the reasons for nonparticipation, and papers by the International Monetary Fund and the Federal Reserve Board.
  • A brief from the Center for Retirement Research at Boston College on the impact of aging baby boomers on labor-force participation.

An earlier version of this QuickTake incorrectly described the relationship between labor-force participation and economic stimulus. A shrinking workforce increases the risk that a stimulus can produce inflation.

First Published May 15, 2014

To contact the writer of this QuickTake:

Victoria Stilwell in Washington at vstilwell1@bloomberg.net

To contact the editor responsible for this QuickTake:

John O'Neil at joneil18@bloomberg.net