THE unemployment rate is computed from two pieces of data: the number of unemployed workers in the economy, and the size of the labour force. A deterioration in the unemployment rate can occur when unemployment grows due to job loss, but it can also occur when unemployment rises due to growth in the labour force. Workers without jobs who begin looking for work are suddenly counted as labour force members.
The outlook for the American unemployment rate will therefore depend on how many of the workers who have dropped out of the labour force through the recession decide to come back in. In a new economic paper for the San Francisco Fed Joyce Kwok, Mary Daly, and Bart Hobijn investigate recent patterns in participation for a few different labour market groups in order to evaluate just how many jobs the economy will need to create to rapidly bring down unemployment. Consider older workers:
In the case of the labor force participation rate of older workers, secular trends generally overwhelm cyclical patterns. Labor force participation of workers 55 and over consistently fell from the 1950s through the 1990s, when Social Security, pension, and retiree health benefits increased substantially and conditions were generally favorable for early retirement. However, in the 1990s, as the value of those retirement programs eroded, older workers reversed the downward trend. Since then, their labor force participation rate has risen steadily, even through cyclical downturns. Even though their unemployment rate more than doubled over the past three years, older workers have generally stayed in or entered the labor force...
The upward trend may continue in the near future. The trends in retirement and health benefits will probably remain in place and the recession's severe shock to wealth will likely compel even greater numbers of retirement-age workers to stay in the labor force (Daly, Hobijn, Kwok 2009). Although it is very difficult to predict the magnitude of future increases in the labor force participation rate of older workers, it's something labor market experts must watch closely. Older people now make up almost a third of the population. Their labor force participation has particularly important implications for the aggregate labor supply.
It certainly seems reasonable that older workers whose main sources of retirement saving—401(k)s and housing wealth—have been battered by recession would feel the need to find new employment and stay in the labour force longer. On the other hand, older workers might be among the most easily discouraged. Their skill sets may be obsolete and retraining may be an unattractive (and uneconomic) option. They might (reasonably) expect to have a difficult time finding a new job in the currently productivity-obsessed labour market. And so many older workers might primarily be interested in taking advantage of unemployment benefits until they reach an age at which they can retire. Here's one data point on this score:
The number of former workers seeking Social Security disability benefits has spiked with the nation's economic problems, heightening concern that the jobless are expanding the program beyond its intended purpose of aiding the disabled.
Applications to the program soared by 21 percent, to 2.8 million, from 2008 to 2009, as the economy was seriously faltering...
About half of all applicants eventually make it onto the disability rolls - a percentage that has not changed appreciably with the recent spike in applications, Social Security officials say. The average age of new recipients is 49 - and less than 1 percent of them return to work, according to the Congressional Budget Office...
In bad times, the disability rolls are swollen by "a lot of older workers who are very much on the margins. Often, they are the first people laid off," Social Security Commissioner Michael J. Astrue said. "They can't find any new work and they are desperate. So they have every incentive to try and get in the program."
The exit from the labour force of lots of older workers would be good for the unemployment rate, but not necessarily good for the broader economy. Economists and policymakers will be watching closely to see which way older worker participation is likely to tip.