In the past four years, the number of adult Americans who
aren't working and who aren't looking for work has swelled by six million,
pushing labor-force participation rates to the lowest levels in 16 years.
Now that the job market appears to be improving, some
economists believe it is time for labor-market dropouts to drop back in again.
"If workers are having some sense that the labor market is starting to pick up
you would expect them to come back into the labor force in larger numbers," says
Harry Holzer, an economist with Georgetown University and former chief economist
with the Labor Department.
But it may not work out that way. That is because a mix of
demographic and social trends has been at play in driving Americans out of the
labor force, and those same trends could keep them out even as the economy
begins to strengthen.
Many of the workers who left the labor force in recent years
are the much-talked-about discouraged workers, people who had such a difficult
time finding work that they stopped looking. These are the individuals whom many
economists expect to flood back into the labor force in the months ahead.
However, a large number of people who have left the job market
don't fit neatly into that category. Students, for example, are spending more
time at their studies, rather than concocting dot-com dreams in their dorm rooms
or taking afterschool jobs. Other Americans are attending to responsibilities at
home, retiring early or collecting disability benefits. While the weak job
market had undoubtedly been a factor in their decisions, it wasn't the only
factor.
The bottom line, some economists say, is that the labor force
might well grow at a slow pace even if job growth picks up and even as
discouraged workers return.
This has important implications for everything from how fast
the economy can grow to how many jobs it needs to create to hold down
unemployment. Economists generally believe the economy needs to create about
150,000 jobs a month to keep up with the addition of new entrants to the labor
market. But in a new period of slow labor-force growth, the threshold might be
100,000 or below, according to a recent study by the Federal Reserve Bank of
Atlanta.
That might sound like good news because it means less
competition for each potential worker. But it's not all good, says Dale
Jorgenson, a Harvard economist who specializes in something called growth
accounting, which breaks down the engines of economic growth -- most notably
productivity growth and changes in the labor force.
While productivity is booming and boosting economic growth, a
slow-growing labor force will hold back the economy's overall growth rate in the
years ahead, he says. That means less consumption and less investment than some
might expect.
Some private economists believe the economy can grow at a pace
of nearly 4% in the years ahead, but Mr. Jorgenson says the growth rate will be
just a little more than 3%.
"We're not going to have a return to the 1990s and we better
live with it," he says.
In a new set of calculations, he estimates the number of hours
Americans clock at work will grow by 0.7% annually in the next 10 years, a sharp
slowdown from the pace of roughly 1.5% growth that prevailed from the 1960s
through most of the 1990s.
Such a slowdown has long been foreordained, because baby
boomers are creeping closer to retirement. But what is surprising is that it is
potentially happening now, before the oldest boomers have reached their golden
years.
Labor Department statistics, for instance, show sharp increases
in the number of women, age 25 to 54, who are out of the labor force and
attending to responsibilities at home. This number was declining through most of
the 1990s, but then started to rise again in 1999 -- before the recession set
in. Between 1999 and 2003 their ranks jumped 13% to 8.8 million, according to
data compiled by Labor Department economist Steve Hipple.
"We're at the end of an historic period where female
labor-force participation rates had been steadily climbing," says Mr. Jorgenson.
Teens and young workers in their 20s are another driving force
in this trend of slow labor-force growth. A recent study by economists at the
Federal Reserve Bank of Chicago found young Americans behaved differently in the
recent downturn when compared with the downturn of the early 1990s.
Back then, an increasing number of teens and college-age
students chose to go to school and work at the same time. But from 2000 to 2002,
on the other hand, they stayed in school and moved out of the labor force in
large numbers. The authors -- Daniel Aaronson, Ellen Rissman and Daniel Sullivan
-- argue young workers are potentially responding to the higher wages that are
being earned by workers with high skills by dedicating more time to school and
less time to work.
Meanwhile, the number of adult Americans who say they are out
of the work force and disabled increased by 18%, or 1.8 million, from 2000 to
2003. The number of people ages 25 to 54 who said they retired increased by 27%,
or 234,000.
It all adds up to a labor-force slowdown that has been much
more complicated than many economists believe. The wild card in whether this
slowdown will persist is older workers. Surprisingly, the oldest workers --
those 65 and over -- are the ones whose labor-force participation rates have
picked up the most in the past few years. They are healthier. And if Social
Security reform entails an increase in the retirement age -- as some argue it
should -- they might find they have to work longer than they expected.