Where have all the jobs gone?
There’s a cottage industry growing up around the question as to whether current unemployment is cyclical or structural. That is, whether it represents a short-term consumer-based pullback in aggregate demand, or whether it comes from a mismatch between labor skills and the kinds of jobs employers want to fill right now. With over 88 million people not in the labor force, it’s an important question.
It’s important because of the policy implications. If the downturn is cyclical, then all government has to do is jump-start the economy and the Great American Jobs Machine should come roaring back. But if the lack of jobs comes from structural issues then all the stimulus in the world won’t turn unemployed home-builders into software engineers.
For my money, I think this debate misses the point. The real story behind last month’s anemic jobs report was the disappearance of another 340 thousand workers from the labor force. Since the start of the recession the labor force participation rate has fallen from 67% to 64%. But that just continues a trend that began in 1998, when the participation rate hit 68%. During that time the number of people not in the labor force grew from 68 million to 88 million—an annual growth rate of over 2%. This is much faster than the overall economy.
So where have those workers gone? My guess is that a lot of them are on disability or have gone into early retirement. In 1995 the first baby-boomers turned 50; that age cohort will start to draw on retirement benefits. If jobs become hard-to-get, they just begin collecting Social Security sooner. But the number of people on disability has grown as well—by over two million since 2010—so much that now the SSDI fund is facing insolvency.
A fifth of Americans aren’t working, and a fifth of personal income is transfer payments. Structural or cyclical: How about both?