During the height of the recession, millions of unemployed individuals stopped looking for work and dropped out of the labor market entirely. Today, while the economy has largely recovered, millions of discouraged workers have not returned to work. The official unemployment rate has been below 5 percent for more than a year, and with millions of available jobs, most unemployed individuals could likely regain entry into the workforce. However, their prolonged absence may tell us something about the societal forces reshaping the labor market.
As American households grow wealthier, it appears that unemployed workers are weighing their options. In an increasingly prosperous society, their immediate return to the workforce is no longer a foregone conclusion. Today’s labor market slack is being absorbed more slowly than in past generations, but that’s not necessarily a sign of economic weakness.
The labor market has always been shaped by societal forces. In the postwar decades, workforce participation grew steadily. The baby boom generation swelled the labor market with young adults, and women began joining the workforce en masse. By the mid-1990s, more than two-thirds of the entire adult population was actively employed or searching for a job.
In the aftermath of the 2008 recession, the share of adults participating in the workforce declined to 63 percent, a level not seen since the late 1970s. And while the overall falloff in workforce participation is largely due to the baby boom generation reaching retirement, younger workers are also experiencing lower levels of workforce engagement.
Twenty years ago, 84 percent of adults ages 25 to 54 were in the workforce. In the wake of the recession, the participation rate for these workers tumbled to near 80 percent before slowly recovering to around 82 percent today. That gap represents 1.8 million potential workers that are absent from the job market.
The falling workforce participation trend has been especially pronounced for the youngest workers. Following the recession, more than 1.5 million Americans ages 16 to 24 dropped out of the labor market. Unlike their older peers, this age group has not seen a significant recovery in workforce participation.
Falling workforce participation among the youngest group can likely be attributed to increasing educational attainment. The recession seems to have convinced many young people that they’re better off staying in school and delaying the start of their careers. Ultimately, this decision could benefit the economy, as these more educated workers will likely be more productive in their prime working years.
But what about the middle-aged dropouts? Some of them have also gone back to school, deciding to finish their degrees, even as the job market heats up. Others are likely stay-at-home parents, unable to find a job that pays enough to offset childcare costs. Whatever their reasons for delaying re-entry into the workforce, they don’t seem desperate to go back to work.
The 2008 recession cut the labor market more deeply than any downturn since the Great Depression in the 1930s. And while many of the displaced workers have been slow to return to the job market, it may be due to increased prosperity in the US. Both in terms of GDP per capita and wealth as a ratio of income, households today are better off than in any previous generation.
During the Great Depression, desperate unemployed workers were willing to move across the country for any promise of work, even subsistence-level agricultural jobs. Today’s workers are much more likely to have a cushion to fall back on, allowing them to be more selective about which job opportunities they pursue.
The labor force’s increasing flexibility should change the way we think about unemployment. In past generations, when most unemployed workers had little choice but to take any job available, the official unemployment rate was a reliable barometer of labor market slack. Economists could assume that nearly everyone without a job was actively searching for one, and when the headline unemployment rate fell below 5 percent, full employment was at hand.
Today, there is a large population of jobless workers who are in a position to temporarily leave the labor market while waiting for the economy to improve. But they’re not gone for good—as the economy recovers, the workforce participation rate has climbed steadily, signaling workforce dropouts will return to the job market eventually.
The economy will not reach full employment until this hidden source of labor market slack is absorbed. The remaining discouraged workers might be more selective about their opportunities than past generations, but their return to the labor market will enable the economy to sustain an above-trend growth pace for far longer than the official unemployment rate suggests.
View our economic commentary disclaimer.
Weekly insights on the economic issues that matter most to your business.