Forget the Unemployment Rate: The Alarming Stat Is the Number of 'Missing Workers'

Nancy Cook

The federal government’s latest snapshot of the unemployment rate offered few bright spots Friday. The economy added 165,000 jobs in April—slightly better than March’s revised number of 138,000 jobs. Unemployment went down one-tenth of a percentage point to 7.5 percent; and health care, retail trade, and the food-services industry added positions.

The glaring caveat to this jobs report is the huge number of Americans who remain out of the workforce. Called the "labor force participation rate" in wonkspeak, that number held steady in April at 63.3 percent—the lowest level since 1979.

The economic blogosphere erupted this week with a debate over why that number has been so low and why so many people have dropped out since the start of the Great Recession. Was the decrease a symptom of the weak job market, or just a sign of baby boomers starting to retire en masse?

Demographics and retirements certainly played some role, though economists cannot agree on the extent. About 6.7 million people have stopped looking for work since late 2007, says Heidi Shierholz, an economist with the left-leaning think tank Economic Policy Institute. Roughly 3 million to 5 million of them left because they could not find jobs, economists estimate.

Mind you, these are not people who collect unemployment insurance and send out resumes in search of their next gig. These are people who—at least, temporarily—have exited the workforce. In March, the jobs report showed that 496,000 had dropped out.

So, who are these “missing workers?” Frustratingly, no one knows exactly who they are, why they left, and if they’ll ever return. “The size of the pool there and the gap between the potential labor force and the actual working force represents a huge loss of potential productivity,” Shierholz says.

The answers also have deep political and policy implications over the next decade for the economic and budget outlook: Do we want to pay for the missing workers through programs that help to spur job growth, or through an increased cost in federal benefits?

Economists have not done any precise calculations yet on the way missing workers hinder future economic growth, such as a potential knock to the gross domestic product. Anecdotally, researchers such as Shierholz argue that people who drop out of the workforce are less productive and less likely to maximize their earning potentials over their lifetimes.

If these workers do not return to the labor market, their absence may alter the country’s budget picture. “One of the biggest problems we face with the baby-boomer bulge in retirement is having enough workers behind them to pay their bills,” says Harry Holzer, a professor at Georgetown University’s Public Policy Institute.

Missing workers can translate to a decrease in tax revenue, coupled with an increase in the use of government benefits, such as food stamps and disability insurance. The number of Americans collecting food stamps hit a high of 47.8 million people in December 2012. A similar spike has occurred in enrollments for the Social Security disability payments.

Since the start of 2007, the percentage of Americans in the labor market has dropped from 66.4 percent to 63.3 percent. In the 1970s and 1980s, the number of working Americans grew—because of the dramatic increase in women holding jobs outside of the home.

The percentage of Americans in the labor market peaked in the late 1990s with the booming Clinton-era economy. Remember all of the exuberance before the tech bubble burst? Since then, the labor force participation rate has been on a gradual decline. A decade from now, that rate will probably be even lower. “As the population ages, people are reaching the time when you would expect some of them to retire,” says Paul Ashworth, the chief U.S. economist for Capital Economics.

Political leaders and policymakers must weigh the economic implications versus the budgetary ones. If no one attacks the jobs crisis with gusto and addresses the issue of the long-term unemployed and the missing workers now, the United States essentially consigns people to rely on government benefits. That will only hurt the budget.

And, if lawmakers decide to attack the problem of the missing workers now, they’ll need to spend more money on job-training programs or infrastructure projects—anything that puts people back into a job, even a temporary one. A trio of economists at a recent hearing on the long-term unemployed presented many creative ideas for putting Americans back to work.

The answer to the missing-worker question may not become clear until the unemployment rate returns to a normal level of roughly 5 percent. The Congressional Budget Office estimates that won’t happen until 2017, when the rate is expected to fall to 5.5 percent.

Only then can economists gauge if people have left the workforce because of the downturn in the economy, or if they’ve left forever because the economy fundamentally changed. If that’s the case, the U.S. officially will become a place where the labor market has little use for millions of Americans.