Labor-Market Dropouts Stay on the Sidelines

Low Workforce Participation Rate, Amid an Improving Economy, Nags at Economists



A U.S. economy that suddenly looks healthy—50 straight months of job gains, best quarter of growth in 11 years—is falling short in a key area.

It isn’t luring back many of the millions who dropped out of the labor market during the down times. That failing nags at many economists.

Federal Reserve Chairwoman Janet Yellen monitors the declining share of Americans working or looking for work as a measure of slack in the job market. She has cited the low labor-force participation rate, as the measure is formally known, to justify the Fed’s long easy-money quest to stimulate the economy and boost wages.

A more buoyant economy and tightening labor market were supposed to draw in those now sitting on the margins. But the probability of a worker re-entering the labor force continues to slump. Over the past three months, an average of 6.8% of those outside the labor force either found a job or began looking for one. That means people are entering the labor force at the lowest pace in records kept since 1990, down from more than 8% in 2010.

So even as the labor market has strengthened, the chance that a jobless worker will ever return to the workforce has decreased.

“To our disappointment, we haven’t seen the flows moving in a way that indicates we’re on the cusp of a big pickup in participation,” said Mike Feroli, the chief U.S. economist at J.P. Morgan Chase.

Every month, millions of workers leave the job market because of retirement, to care for children or aging parents, to pursue more education, or out of discouragement. Millions of others jump in after graduating, or finding jobs that entice them to re-enter.

If a strengthening economy prompted enough workers to return, the entrances could begin to outweigh exits. So far, that isn’t happening.

In December 2007, the month the recession started, 66% of the working-age population either had a job or was looking for one. That share fell during the recession and has continued dropping ever since. In September, participation dropped to 62.7%, the lowest since 1978, and remains near that level.

Some decline in the labor force was expected as the massive baby-boom generation born after World War II began turning 60 and retiring by the millions, in the mid-2000s. Few retirees return to jobs. Around 18% of those over age 65 are in the workforce.

The decline in boomer participation isn’t the sole reason behind the decline. Another big explanation could be that people who drop out amid a bad economy can’t easily be enticed back. Economists call this labor-market scarring. People find other ways to get through life, even precariously, by relying on friends and family, going on disability or retiring early. “You can leave for economic reasons, but it doesn’t mean you’re going to come back for economic reasons,” Mr. Feroli said.

Determining the cause and finding solutions for depressed participation has important implications. The size of the workforce is a key determinant of how fast the economy can grow. A smaller workforce presents a drag to growth. With fewer workers paying taxes, the government’s fiscal picture is more challenging. In the late 1990s, when the U.S. last ran budget surpluses, the participation rate was nearly five percentage points higher than today.

In recent years, Fed officials had cited the declining labor force as evidence of economic slack. The traditional unemployment rate counts only those actively looking for work; those who stop looking entirely are counted as labor-force dropouts. The Fed pressed on with easy-money stimulus efforts, citing the belief that the jobless rate, while declining, understated the true extent of economic weakness.

Former Fed Chairman Ben Bernanke, for example, espoused the central bank’s consensus view. In March 2013, when the unemployment rate was 7.7%, Mr. Bernanke said discouraged workers would return. “As the economy strengthens, the labor market strengthens,” he said.

The unemployment rate since then has fallen by nearly two percentage points as the economy added 4.4 million jobs. Consumer sentiment has gradually climbed to the highest level in nearly eight years. The flow into the labor force, however, has declined.

The Fed’s explanation that dropouts will return is “losing a little bit of traction because participation is just not going up,” said Joseph LaVorgna, chief U.S. economist for Deutsche Bank.

If unemployment continues coming down and part-time workers who want full-time work find it, then the labor market may be as close to healed as the Fed can get it.

The next year could provide another test for the Fed’s view. Perhaps only a true boom can revive the workforce. The average estimate in a Wall Street Journal survey of economists says unemployment will drop to 5.3% by the end of next year. Gasoline prices have declined by more than 90 cents a gallon from last year, helping to lower commuting costs and monthly expenses for many Americans.

“Things are setting up for some momentum in the economy that’s really been lacking,” said Laura Rosner, a U.S. economist at BNP Paribas. “Is this something that households more broadly are going to notice? Is this going to draw some of those labor market dropouts back in? If we are going to see it, this kind of turning point would probably be when we see it.”

Write to Josh Zumbrun at

Labor-Market Dropouts Stay on the Sidelines