Why People Might Pull Back from the Job Market

Back in early summer we expressed concern that fewer people are participating in the labor market – fewer people are working or actively hunting for work, relative to the size of the population – than has been the case for more than 35 years.  Five years after the presumed end of a massive recession, this fact surprised us and we promised to look more into what might be going on.  Shouldn't more people be more anxious to work or to find work?  Instead, the so-called labor force participation rate stands at just 62.8% of the population as of October, down from 65.7% in July 2009, the last month of the official recession period.

To recap our June comments a bit, we look at three different age groups, older people, teens and middle-agers, each of whom has a distinct relationship to the labor market that reduces its participation.  First and perhaps most straightforward, there are more and more older people, so retirement is a bigger factor than it has been historically.  Indeed, Federal Reserve economists have used fairly simple arithmetic with Labor Department data to estimate that about 1.25% of the decline in the participation rate is due to the aging population.[1]  We could explore retirement more, of course, but for our current discussion, this much about that group will cover it.  Second, teen-agers seem to be less interested in getting a job than they were "when we were their age".  Our subsequent research has turned up three reasons for this, which we will discuss momentarily.  Finally, an increased share of middle-age workers has been pulling back from the workforce.  Since this group is obviously the most important part of the working population, we want to know more.

Teens:  School and Competition from Immigrants

For teenagers and young adults, increased schooling looks to be the main force.  Aaronson and her Federal Reserve colleagues, whose study we just referenced about retirees, discuss teens as well, examining the monthly employment data and the Labor Department's "American Time Use Survey". They show that more young people are enrolled in school and for those enrolled, school and extracurricular activities take more time every day.  You parents would be aware of this, and the numbers show it to be so.  They estimate that school enrollment – including increased attendance in summer school – and school time factors account for about three-quarters of the decline in teen-age participation in recent years.[2]

There are two likely and similar reasons for the remaining fall-off in teen-age work interest.  First, teens face heightened competition from adults without college educations.  Due to changing technology, those adults face an increasingly complicated job market.  It turns out that the kinds of work young people often do, such as food preparation, retail sales and personal care, are now done by older workers more frequently than before.  We'll detail this issue when we talk below about middle-agers.  Second, teens also face increasing competition from immigrant workers.  Extensive statistical analysis shows that teens have been more susceptible than adults to competition from the growing numbers of immigrants who have no more than a high school education.  These immigrants would have about the same amount of work experience in the U.S. as do native-born teenagers.[3]

So altogether, teens are spending more time in school, and they are meeting greater competition for the kinds of jobs they often do; these factors are discouraging more of them from even trying to find jobs.

Middle-Agers: Job Polarization a Growing Obstacle

The group that concerns us most are the middle-agers, whom labor market analysts refer to as "prime-working-age" from 25 to 54.   While 81% of this huge group do work or actively seek work, that share has come down from 83% just before the recession.  Our research "googling" has turned up papers from other business economists, Federal Reserve economists and even the Fed's Chair, which all indicate that we are hardly the only people puzzled over this pull-back from work.  Even if 2 percentage points doesn't look very dramatic, the growth of the economy as a whole and especially the well-being of those very people who have pulled away can be hurt.  What's been going on with those middle-agers?  Can we tell something about why?

San Francisco Federal Reserve economists Mary Daly and Elliot Marks argue that the depth and severity of the recession have discouraged people but now that total employment is finally back to pre-recession numbers and looking more vigorous, those people might be expected to re-enter the labor force and seek jobs anew.[4]  Indeed, the September and October employment reports did look more favorable, extending a trend of quite decent job growth through seven months and including upward revisions to the last three months' results.  Daly and Marks seem to argue that this will re-attract some "non-participants".  They further argue that, as such a trend might feed on itself, work will become far more enticing than it has been over the last six or seven years.  Separately, the latest several weeks' data on new claims for unemployment insurance show that layoffs are holding at eight-year lows, another favorable sign.

Other writers are not so sanguine.  A whole group of studies has emerged describing a spreading phenomenon known as "job polarization".  This development could well discourage a sizable group of people from even trying to find work.  You might be able to guess what it means just from what you already see every day in the working world.  At one end are high-level jobs in technology and finance and business management.  At the other end are service jobs, such as those in restaurants and hospitals.  The middle range of factory workers and office administrative positions is shrinking.  Robots and other sophisticated machines do increasing amounts of manufacturing assembly work, while the very computers you and I use every day replace more and more secretaries, bookkeepers and the like.  So the mix of jobs – and incomes – are more and more polarized: high-end jobs and low-end jobs predominate.  This force plays into the income inequality situation, as it seems to mean that energetic people who may not have advanced educations might not be able to move up in the world as they have been in recent decades.  A whole "special report" in a recent issue of The Economist puts this in fairly stark terms and discusses its global reach, as it is hardly confined just to the US and Europe.[5]

There's no concrete proof that polarization is directly connected to people's withdrawal from the labor force, but we can make one strong inference.  The monthly employment survey asks people who are "not in the labor force" if they would actually like to have a job or if they don't want to work.  For the middle-aged population, the share who say they don't even want a job has risen from 14% of that population in the late 1990s to 17% more recently.  The share of that age group who would work if they thought there was a good chance of getting a job has also risen, albeit marginally.  Since this age group is much less subject to retirement than older workers and is seen to face less impact than teens from the influx of foreign workers, we can only believe that discouragement over the increasing lack of opportunity is a major factor holding them back.

What Can We Do? Post-High School Training

So what can be done about "job polarization" and about lower teen participation in the workforce?  Are we stuck in a new economic quagmire?  A full-blown answer would take much more space than we have here, but we can offer a couple of ideas.

The Labor Department makes 10-year projections of the growth in various occupations and categorizes them by the amount of education needed for entry.[6]  The middle-range ones being hit by polarization are typically filled by people with a high-school diploma.  Sure enough, projections for those show several office functions and various kinds of factory assembly work with absolute declines over coming years.  Even with other jobs expanding, such as personal care assistants, computer-controlled machine operators and customer service representatives, total jobs for high school grads are seen as the slowest growing segment.

By contrast, if people get just a bit more education, such as a vocational school or community college, their prospects pick up sharply.  That is, if they get training in some technical skill or perhaps additional math background, more occupations with greater prospective growth will be open to them and will enable them to move ahead rather than languish.  And, in addition, make more money over their working lives.

Teach Soft Skills

Another word we've seen in discussions of these issues is "employability".  Specific job qualifications are obviously important.  But recently, prospective employers report that they often meet candidates who don't have so-called "soft skills".[7]  While the amount of education someone has may address the impact of job polarization, it can be the soft-skill, employability issue that covers everyone and all jobs, technical, advanced professional or low-end, this last sort the kind that teenagers and immigrant laborers often compete for.  Soft skills: do you dress properly, are you on time, do you listen carefully to instructions and in turn do you ask relevant questions to clarify and enhance your understanding, and perhaps most seriously, can you pass a drug test.  Indeed, in a recent listing of the 10 most important skills employers are known to desire in order to hire for some presumed popular jobs, the first four are the soft ones.[8]  Would you be a responsible and attentive worker, whatever the job itself is about.  These skills can be taught at home, in high school and also in many workforce development programs run by local governments and nonprofit organizations.

So training focused for the workaday world is one big answer to our potential job and labor market predicament.  There are also social factors, such as single-parent households, that contribute to trends in labor force participation.  And we haven't mentioned lackluster wage gains.  So there is farther to go on these issues.  For the present, we do have the one approach of training, which can help, and help a lot.

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[1] Stephanie Aaronson, et.al. "Labor Force Participation: Recent Developments and Future Prospects".  Paper prepared for the Fall 2014 Brookings Panel on Economic Activity.  September 2014. Page 23. http://www.brookings.edu/~/media/Projects/BPEA/Fall%202014/Fall2014BPEA_Aaronson_et_al.pdf

[2] Op. cit., page 26.

[3] Christopher L. Smith.  "The Impact of Low-Skilled Immigration on the Youth Labor Market,"  Journal of Labor Economics.  Vol. 30, No. 1, January 2012.  Pp 55-89.

[4] Mary C. Daly and Elliot M. Marks.  "The Labor Market in the Aftermath of the Great Recession," Business Economics.  Vol. 49, No. 3, July 2014.  Pp. 149-155.

[5] Ryan Avent.  "The Third Great Wave," The Economist.  October 4, 2014.  Special Report, pp. 3-18.  http://www.economist.com/news/special-report/21621156-first-two-industrial-revolutions-inflicted-plenty-pain-ultimately-benefited.

[6] U.S. Bureau of Labor Statistics.  "Employment Projections: Occupational employment, job openings and worker characteristics." December 2013.  http://www.bls.gov/emp/ep_table_107.htm.  The table includes more than 800 occupational categories, which we sorted by educational requirements.

[7] Dennis Lockhart.  "Strategic Workforce Development: Training for Employability."  Keynote Remarks for Community Development Conference: Transforming U.S. Workforce Development Policies for the 21^st Century.  Rutgers University, New Brunswick, New Jersey, October 16, 2014.

Lockhart is President and Chief Executive of the Federal Reserve Bank of Atlanta, a co-sponsor of the conference.  He mentions three soft-skills training programs, Year-Up, STRIVE, and 12 for Life.

[8] Meghan Casserly.  "The 10 Skills That Will Get You Hired in 2013,"  Forbes website, December 10, 2012.  http://www.forbes.com/sites/meghancasserly/2012/12/10/the-10-skills-that-will-get-you-a-job-in-2013/.

Also see Rachel Burstein.  "Here Are the Crucial Job Skills Employers Are Really Looking For."  Time.com website, August 29, 2014.  http://time.com/author/rachel-burstein/.