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WebMemo #406 on Jobs and Jobs and Labor Policy

January 28, 2004

The American Workforce: Strong Facts Trump Weak Myths

By

The catchphrase "jobless recovery" enjoys permanent status in daily media reports about the economy, despite the fact that an unprecedented number of Americans were employed last quarter, not to mention the low rate of unemployment. Skeptics attribute lower unemployment to growing ranks of "discouraged workers" leaving the labor force, but that scenario doesn't fit the data. Teenagers account for two-thirds of the decline in the labor participation rate in recent years, and their decision to work less could have an encouraging cause: the increasing market value of a good education.

 

More Workers Than Ever

The good news is that the number of American workers is at an all time high of 138.5 million - a level never attained in U.S. history. Most measures of the labor market indicate strength across the board. Jobless claims are 10 percent below the average of the last 25 years and still falling. Hiring indices are up, even in manufacturing. Productivity growth is extremely high. And real earnings have risen over the last three years. The most visible indicator of all, the unemployment rate, is coming back to its natural, full-employment rate.

Now skeptics have started to question the integrity of the unemployment rate, which at 5.7 percent just does not fit their gloomy story. Policymakers and the media need to take a closer look at the myopic arguments of the skeptics and recognize the facts of a strong labor force.

 

Unemployment Rates are Truly Low

The skeptics have gone to new lengths in spinning the low rate of unemployment coming out of the Labor Department's household survey as an illusion. Their main argument is that Americans are so discouraged by weak labor markets that they have stopped looking for jobs, and therefore no longer count as unemployed. Keep in mind, however, that the household survey is also the source of the record-high 138.5 million employment number.

The December survey showed a drop in the unemployment rate, but also a one-month decline in the size of the labor force. Exaggerated stories of discouraged workers, involuntary part-timers, and declining participation rates soon followed. Skeptics usually dismiss the household survey's long-term trends - ironically due to its short-run variability - but made an exception for anomalies in the one month of December.

Step back from the myopia, and consider the facts:

  • 4th quarter data are overwhelmingly positive. The data for the entire 4th quarter of 2003 show that the civilian labor force rose by 333,000, while the number of unemployed in the labor force dropped by 575,000. Even better, the number of so-called discouraged workers actually declined in December.
  • Part-time workers are predominantly voluntary. Only one in five part-timers prefers a full-time job, a fact which is completely in line with the decades-long demographic trends of working mothers and part-time retirees. There are currently 5 million part-time workers who prefer full-time, far below the nearly 7 million mark set after the last two recessions.
  • Teens are driving the lower participation rates. While overall participation rates are a point and a half below historical peaks of the late 1990s, the bulk of the decline is among Americans aged 16-19. The participation rate among adults is 67.8 percent, just half a point below the average of 1998-2002. In short, teenagers account for two-thirds of declining participation rates, but only 5 percent of the labor force. (See chart: Labor Force Participation Rates; data from the Bureau of Labor Statistics Household Survey)

 

Where Have All the Youngsters Gone?

Among teens, the participation rate peaked at 59 percent in 1978 and has trended down by 3 percent per decade. The rate dropped dramatically by 10 percent over the last three years. Currently, only 43.2 percent of teenagers participate in the labor force, a level seen only once before, in 1965. For perspective, the rate hasn't been below 50 percent since 1971, save one month in April 1992.

We can only speculate as to why four in 10 teenagers now look for work, instead of the traditional five in 10. Most likely, young Americans have not lost jobs and become discouraged; rather, they never looked for a job in the first place. Perhaps working while in school makes less sense in an era when human capital development is so important for lifetime income. Far from a crisis in the job market, this is probably a positive trend for American students' ability to focus on education. Take it as another sign of a workforce that is evolving towards knowledge-driven service industries and away from muscle jobs.

Policymakers need to recognize that a strong economy is the context for their decisions in 2004. There are more Americans working than ever before, even though fewer teenagers are participating in the workforce. Caveats about a jobless recovery are becoming increasingly discredited by the facts. Efforts to limit free trade, to protect manufacturing, or to freeze 20th century labor laws are based on shaky intellectual arguments and even shakier economic statistics. The real policy challenge is not to protect the jobs of the past but to free up the economy so it can create new jobs faster.

Timothy Kane, Ph.D., is Research Fellow in Macroeconomics in the Center for Data Analysis at The Heritage Foundation.

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