05/14/2013 12:43 pm ET Updated Dec 06, 2017

San Francisco Fed Study On Jobs Debunks Multiple Dumb Talking Points In Single Swoop

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The job market is obviously broken, but a new study suggests the damage might not all be permanent.

Economists at the San Francisco Federal Reserve on Monday suggested that the recent mysterious trend of workers dropping out of the labor force is at least partly due to plain old lousy economic growth, rather than the result of something less reparable -- like a nation of poorly trained doofuses or President Obummer killing our jobs forever with health care and Benghazi.

"The most recent U.S. recession and recovery have been accompanied by a sharp decline in the labor force participation rate," the economists wrote. "The largest declines have occurred in states with the largest job losses. This suggests that some of the recent drop in the national labor force participation rate could be cyclical."

What is this "labor force" of which these economists speak? It is the number of people who are of working age and either hold a job or are looking for a job. The "participation rate" is the percentage of the working-age population that is involved in the labor force, and it has been tumbling since the Great Recession, as you can see from the scary chart below. (Story continues after scary chart.)

labor force participation

This decline has actually helped lower the unemployment rate, because when people drop out of the labor force (by going back to school or just giving up the job search completely), they are no longer counted as "unemployed." However, you can hardly call the dropout rate a good thing: It means there are growing numbers of working-age people sitting on the sidelines of the economy.

One explanation for at least some of this is that Baby Boomers are simply getting older and retiring from the labor force. But that may not even account for half of the decline.

Another explanation is that people have left the labor force because they don't have the right skills. Either they're busy getting re-educated, or they have given up forever on doing anything but flipping burgers. Let's call this the Thomas Friedman Theory, and maybe give it less weight than the Old People Theory.

There are even less credible theories out there, including that people never want to work again because life on the government dole is so awesome these days, or that businesses are just refusing to hire until Obama is impeached. Let's call this the Glenn Beck Theory.

It is likely, though, that many people have given up on ever finding work again because the economy is still sort of awful. Economist Heidi Shierholz at the Economic Policy Institute recently estimated that there could be 4.4 million people in this group -- the bulk of the decline in the labor force.

The San Francisco Fed economists didn't go as far as Shierholz in trying to number the workers discouraged by a bad job market. Instead, they simply tried to confirm that this group exists at all. To do so, they broke down labor force participation by state. If nationwide, irreversible trends were the only thing driving people out of the labor force, then the erosion should look pretty uniform across different states. Instead, the economists found that labor force participation varied noticeably from state to state.

It turns out that the states with the biggest job losses also tended to suffer the biggest declines in labor force participation. These include states like Georgia, Alabama and Michigan. On the other hand, states that didn't suffer big job losses also haven't suffered as much labor force drain. These include Texas, North Dakota and the District of Columbia.

This suggests that some of the declines in the labor force participation rate could be reversed. The relationship between job growth and labor force growth has broken down a bit during the recovery of the past few years, but the San Francisco Fed economists theorize in their study that the breakdown occurred mainly because the job market recovery has been god-awful, the worst since World War II.

A stronger economy should lead to a stronger job market, which should lead more people to jump back into the labor force.

Unfortunately, aside from the Federal Reserve, policymakers in Washington have given up trying to help the economy. Instead, they are slowing it down with austerity. What's worse, the slowly shrinking labor force makes it harder to get a true picture of the labor market's weakness, meaning the Fed could join the rest of Washington in giving up on the economy too soon.

That could leave millions of workers permanently on the sidelines.



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