Labor Force Participation At Lowest Point In 3 Decades

The improvement in the unemployment rate in the last year belies the fact that the rate would be so much higher if the number of people in the labor force didn't shrink.

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7.7 percent, that's the current unemployment rate. It's a full percentage point lower than this time last year. That sounds like progress, a modest number of new jobs are being added every month. But labor force participation, a measure of both people who are working and those who are actively looking for work, is at its lowest point in three decades.

As NPR's Yuki Noguchi reports, it's not clear why so many people continue to leave the labor force and how many of them plan to come back.

YUKI NOGUCHI, BYLINE: The storyline is familiar by now. In the face of an uninspiring job market over the last several years, people have retired early, gone back to school, or just plain threw in the towel on finding a job. Sixty six percent of working-age adults were in the workforce when the recession began. Now that's down to 63.6 percent, a few percentage points that add up to millions of people. So are those people gone for good or will they be coming back when their job prospects improve?

JOEL PRAKKEN: That is one of the questions du jour, that's for sure.

NOGUCHI: Joel Prakken is chairman of Macroeconomic Advisors. He says the decline in the labor force far exceeded what the models predicted.

PRAKKEN: So we have to decide whether this is some permanent structural change or whether it's a temporary aberration that's going to reverse itself over the next several years. And the answer to that question has a very important bearing on what employment circumstances and the unemployment rate will look like in 2014 and 2015.

NOGUCHI: If the change is temporary, then you'd expect people to come back over the next couple of years if they feel their chances of getting a job are pretty good. And that influx could push the jobless rate up - that's right, up - because more people would be officially looking for work.

If the change is permanent, those people who left would never come back. And that could keep the jobless rate down, but it would mean many, many people are forever sidelined from the job market.

Phillip Levine is an economics professor at Wellesley College. He doesn't see this as an either/or scenario. He thinks some people will return, but fewer with every passing year because our working population simply isn't expanding that quickly.

PHILLIP LEVINE: We just don't need as many jobs as we used to, just to keep pace.

NOGUCHI: It used to be, about a decade ago, that the economy needed to grow by 150,000 jobs a month just to keep pace with population growth. Levine says demographics have changed that.

LEVINE: So there's three things that affect labor force change: it's the retirement at the end of one's career; it's the entering the labor force at the beginning; and then, there's the impact of immigration.

NOGUCHI: Baby boomers are retiring in greater numbers, people are staying in school longer, and fewer immigrants are entering the country. Levine says the economy today probably only needs to add about a third of the jobs that it used to - about 50,000 a month - in order to have the jobless rate hold steady.

But holding it steady at the relatively high rate where it is now is little comfort for the 12 million people who remain unemployed.

And Heidi Shierholz, an economist with the Economic Policy Institute, believes a majority of those who left the workforce will have to, at some point, try to come back. But she says history offers no good guide.

HEIDI SHIERHOLZ: We've never seen a situation like this where we have good data. We probably saw a situation similar to this following the Great Depression, but we don't have good data from that era. So we have no comparable situation where we had this big a pool of missing workers.

NOGUCHI: How, when, and how many of those missing workers will come back is a big question for the coming year.

Yuki Noguchi, NPR News, Washington.

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