How Much Slack Is in the Labor Market?

465465451The monthly unemployment rate released by U.S. Bureau of Labor Statistics always grabs headlines, especially during a time of economic recovery. In the past few reports, we’ve kept a particularly close watch to further analyze and correlate these numbers with flexible workforce trends.

While the unemployment rate might get the most airtime, the labor participation rate — which measures the active portion of our labor force — is just as important to consider. The most recent February report indicated that this measure has recently declined to its lowest level since 1978.

While the drop in unemployment rate seems to allay people’s concerns about a slumping economy, the decline is misleading. Simply put, the unemployment rate is dropping because more people have completely stopped looking for jobs.

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In our labor force, each 1 percent decline in the labor participation rate translates to a 1.4 percent decline in unemployment. This indirectly renders the unemployment rate an inaccurate gauge of the labor market conditions. So what does this all mean in terms of unemployment and the future of permanent and flexible labor?

Understanding the Labor Participation Rate
People leaving the labor force can be categorized in three ways: those who are retiring, those who have become disabled and “others.” This “others” group can be divided further into two sub-groups: those who do not want to work, and those who would like a job but are no longer looking for one (“discouraged” workers).

Analyzing the Decline of Labor Participation
According to the Social Security Administration, nearly nine million workers today receive disability payments – roughly 6 percent of the U.S. labor force – an increase of more than 75 percent since 2000. While this increase is quite significant and contributes to the drop in labor participation, it is not the dominant force in the trend.

Discouraged workers are often the focus of economic and political discussion surrounding this recovery. This group is cyclical: even though workers become discouraged under tough labor conditions, they’ll gradually rejoin the labor force as conditions improve. The “Dot Com” crash around 2001 provides a good example of this cyclical trend. The number of workers who either didn’t want a job or stopped looking increased until around 2004, when the number slowly declined again as the economy gained momentum.

During the Great Recession, the same phenomenon can be observed. Though the number of workers in the “others” group has stabilized, they have yet to decline, leading to concerns by the Federal Reserve that low interest rates need to persist for longer. Since 2008, this group accounts for about 25 percent of the decline in labor participation, but they haven’t been the culprit in the last two years.

The timing of the Great Recession causes much debate and confusion around the cause of the diminishing labor participation rate. Because the recession took place right before the first cohort of the Baby Boomers was due for retirement, there was speculation that they were delaying retirement because of the loss of wealth. Accordingly, most of the drop in labor participation rate during that time was attributable to the large number of discouraged workers leaving the labor force.

This was further confirmed by data until the end of 2011. Since then, though, retirement has accounted for the vast majority of the decline in labor participation.

Looking Ahead
For the flexible staffing community, there is a great opportunity coinciding with the decline in the labor participation rate. The influx of retirees in the next few years means organizations will have a new set of highly skilled, experienced workers for whom contract work is an attractive option. So even though the decline in the labor participation rate may seem discouraging, contingent workforce programs will likely benefit from a deeper, more experienced talent pool.

MORE: How to manage a diverse workforce

Henry Jia
Henry Jia is a business intelligence consultant with Fieldglass.

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1 comments
EliassenGroup
EliassenGroup

"Because the recession took place right before the first cohort of the Baby Boomers was due for retirement, there was speculation that they were delaying retirement because of the loss of wealth

That always seemed like a logical conclusion to me. Why leave a good job when the future is unsure if you can hold on for a few more years and save a little extra? Fewer people retiringmeant less turnover, which mean the next wave of job seekers had fewer open spots to go after. And when you add in all the laid off workers there were even more job seekers for the limited jobs.

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