Since late 2007, the U.S. labor force has shrunk significantly, raising questions about where former workers have gone and why.
Now the White House Council of Economic Advisers says it has found answers and has compiled them into a detailed research report released Thursday.
As it turns out, most of the missing workers have been hiding in plain sight: They are retiring baby boomers.
“In 2008, the U.S. economy collided with two historic forces. The first force was the Great Recession,” the report said. And the second was “the demographic inflection point” when the oldest boomers, born in 1946, became eligible for Social Security early-retirement benefits.
That age shift explains a lot about what’s been happening with the labor force participants, defined as people who have jobs or want them. So a 62-year-old who retires would not be part of the country’s available labor pool.
Over the past seven years, the labor force, as a share of the overall population, has fallen from 65.9 percent to 62.8 percent, a decline of 3.1 percentage points.
Economists have been arguing over the reasons for this dwindling labor supply, with some conservatives assigning nearly all of the blame to President Obama’s economic policies.
But the CEA report concludes most of the decline, 1.6 percentage point, is due to retirements.
Diana Furchtgott-Roth, former chief economist for President George W. Bush’s Labor Department, has argued against that explanation. She notes that since 2007, the participation rate has risen 2 percentage points among people over 55 years old.
The CEA says that uptick among boomers is not large enough to undo the much bigger trend of an aging population. “Even though these baby boomers are more likely to work at older ages than their predecessors, the employment rates at older ages are still much lower than for younger workers,” it concludes.
The rest of the labor force decline has several causes, the report says. Another 0.5 percentage point of the drop can be explained by the typical pattern of worker discouragement seen in any recession. That is, whenever the economy gets weak, some people give up job searches. But eventually, when the economy perks up, they return.
That leaves 1 percentage point of workers on the sidelines for “other factors, which may include trends that pre-date the Great Recession and consequences of the unique severity of the Great Recession,” CEA said.
CEA Chairman Jason Furman, who presented the report to economists and journalists in Washington, said that back in 1950, prime-age men nearly all worked — with a 91.5 percent participation rate. But since then, legions of women have entered an increasingly automated workforce, and men have pulled back. Today, only 83.4 percent of working-age men hold jobs or seek them.
“Technology is probably part of that story,” he said, noting that many manual-labor jobs have disappeared.
Another factor in the lower participation rate involves the severity of the Great Recession, which was much worse than other post-World War II downturns. Employers laid off so many people that millions ended up spending many months — even years — searching for jobs. Once workers have gotten into the deep rut of long-term unemployment, they can become virtually unemployable, CEA said.
So will the participation rate ever get back to 2007 levels?
CEA concludes that would be very tough. The boomers now in retirement are basically gone for good. The rest of the people on the sidelines potentially could return, but only if the country were to take certain steps, such as improving worker training, increasing tax credits to boost incomes for the working poor, and changing family-related policies to keep more parents on the job, CEA says.
“Absent changes in policies, a meaningful increase in the participation rate from current rates appears unlikely,” CEA concluded.
“Probably the most significant policy response to falling labor force participation rates is immigration reform,” the report says. “On average, immigrants are younger and participate in the labor force at higher rates than native-born Americans.”