Monday, November 24, 2014

Underutilized Labor in the U.S. Economy

A few weeks back I explained "Why Different Unemployment Measures Tell (Mostly) the Same Story." The basic theme was that while you can define unemployment in ways that make the level at a given time higher or lower, these different measures (mostly) rise and fall together. A common reaction in my in-box was along these lines: "OK, the argument about unemployment rates is fair. But isn't the real problem the fall in labor force participation, which isn't captured in the unemployment rate?" Gerald Mayer offers some insight about this broader question in "The increased supply of underutilized labor from 2006 to 2014," which appears in the November 2014 issue of the Monthly Labor Review, published by the U.S. Bureau of Labor Statistics. There is also some interesting complementary analysis of the BLS data from Drew Desilver at the Pew Foundation in "More and more Americans are outside the labor force entirely. Who are they?"

Here is the concern in a nutshell. Sure, the unemployment rate has fallen from its peak of 10% in October 2009 to 5.8% in October 2014. Here's the definition of unemployment, according to the BLS: "People are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work."

This definition of unemployment makes some sense. After all, you don't want to count a happily retired person or a happily stay-at-home spouse as being "unemployed." Also, it's worth noting that as long as you tell the government survey that you are trying to find a job, you continue to be counted as unemployed, even if that period of unemployment lasts months or years. But the specific definition of unemployment also raises questions. In particular, what about a person who looked hard for a job six months ago, gave up in discouragement at the lack of opportunities, but would still like a job if one was available? This person is not counted in the unemployment rate, but instead is "out of the labor force.

The share of Americans out of the labor force has been rising, as Mayer shows in this figure.  I've explored some of the explanations for this phenomenon over the last couple of decades, like an aging population with more retirees and a rise in those receiving disability, in earlier posts (for example, here and here). But it raises the question of whether the quirks of measuring the official unemployment rate are missing out on people who are not being treated as out of the labor force.

Here, the point I would emphasize is that there are two main reasons someone might be out of the labor force. One possibility is that they don't want a job. Another possibility is that they want to work, but for whatever reason they haven't looked for a job in the last four weeks (perhaps because of illness, or being in a training program, or being discouraged about finding a job). The survey refers to this group as "marginally attached" to the labor force, who are defined this way: "These are individuals without jobs who are not currently looking for work (and therefore are not counted as unemployed), but who nevertheless have demonstrated some degree of labor force attachment. Specifically, to be counted as marginally attached to the labor force, they must indicate that they currently want a job, have looked for work in the last 12 months (or since they last worked if they worked within the last 12 months), and are available for work." Here's how Desilver at the Pew Foundation breaks down the reasons that the marginally attached give for why they haven't looked for a job in the last four weeks:


Bottom line: If many of those out of the labor force say that they don't currently want a job, then the unemployment rate is a pretty decent measure of underutilized labor in the U.S. economy. But if many of those out of the labor force want a job but are counted as marginally attached to the labor force, then the unemployment rate would be potentially deceptive.

The statistics on this point are clear enough. The marginally attached can account for about one-tenth of the decline in the labor force participation rate, according to Mayer at the BLS. Or as Desilver writes in the Pew Report: "Last month, according to BLS, 85.9 million adults didn’t want a job now, or 93.3% of all adults not in the labor force."

Desilver also offers an interesting breakdown by age of those who say they don't want a job. Among those 55 and over, the share of those who say they don't want a job is falling. Among those in the 25-64 age bracket, it has edged up just a bit. But the age group with by far the biggest rise in those saying they don't want a job since 2000 is the 16-24 age group.

So what's the bottom line on the extent and patterns of underutilized labor in the U.S. economy? Here are my own conclusions.

1) The decline in the plain old meat-and-potatoes unemployment rate is the last few years is not primarily a result of discouraged or marginally attached workers leaving the labor force. Over 93% of those who are not in the labor force don't want a job right now. Of course, it's always possible that people who say they don't want a job might still be open to the idea of taking one if the right offer came along. But when people who say they don't want a job don't have a job, it's hard for me to regard it as a severe social problem.

2) Those who have part-time jobs are not counted as unemployed, even when they would prefer full-time employment. The number of part-timer who would like full-time work has remained well above pre-recession levels since the end of the Great Recession in 2009, so this is a clear-cut case where the fall in the unemployment rate isn't a good measure of underutilized labor.

3) The official unemployment rate doesn't look at the amount of time people are unemployed, but there is good reason to believe that when unemployment on average lasts longer, or when a larger share of the unemployed have been out a job for a substantial time, the costs both to the individual and to society are higher. Using the ever-helpful FRED website maintained by the Federal Reserve Bank of St. Louis,  here's a figure showing the average length of unemployment, how it spiked far beyond all previous post-World War II experience during the Great Recession, and hasn't yet fallen back into a normal range.

Similarly, here's a figure showing the number of civilians unemployed for more than 27 weeks. Again, the spike during the Great Recession was far beyond any other post-World War II experience, and the subsequent decline is not yet back into the normal range.

4) We are in the midst of a social change in which 16-24 year-olds are less likely to want jobs. Some of this is related to more students going on to higher education, as well as to a pattern where fewer high school and college student are looking for work. I do worry about this trend. For many folks of my generation, some evenings and summers spent in low-paid service jobs was part of our acculturation to the world of work. As I've noted in the past, I would also favor a more active program of apprenticeships to help young people become connected to the world of work.

5) Overall, I wonder if the biggest underutilization of U.S. labor in quantitative terms is not any of these specific issues, but instead relates to the types of jobs available. Many people would not feel satisfied with just a job, any job. They would like to settle into a job that feels like part of a career, where they can build skills over time, get raises, receive health and retirement benefits, build up some status in the workplace, and have some control over their future employment path. The relatively slow growth of the U.S. economy, together with the rise in inequality of before-tax incomes and the declining share of workers who get health insurance and pension benefits through their employers, means that fewer jobs of this sort are available. Perhaps the biggest underemployment of U.S. labor is not among those who don't have jobs, but instead among those part-timers and full-timers who do have jobs but also have the capability to do so much more--if the overall economic environment offered greater support and encouragement.