Posted on by Jim Weber

LFPR and the Demand for Labor Paradox

 

On November 2nd, the Friday before the midterm elections, the U.S. Department of Labor presented its initial report for October.  The report showed that employment increased by 250,000, a 1.7% year-over-year improvement.

 

On Tuesday, November 6,  The Bureau of Labor Statistics released its Job Openings and Labor Turnover Summary,

The report reflected an unemployment of 3.7% and a Labor Force Participation Rate (LFPR) of 62.9%.  Job Openings were reported at 7.0 million, down from 7.3 million the prior month.

 

The bulk of October’s hiring came from three major industry segments; healthcare and social assistance added 46,700 jobs, leisure and hospitality added 42,000 jobs, and manufacturing added 32,000 jobs. The only sector to record a decline was the education sector which dropped 2,500 jobs. On a year over year basis, the manufacturing sector increased employment by 9.4%, construction employment increased by 4.7%, and transportation/warehousing increased 3.5%. The information sector lost a half a point.

 

The September employment figure was revised downward from 134,000 to 118,000, whereas the August figure was revised upward from 270,00 to 286,000.  During the third quarter, GDP increased by 3.5% as compared to 4.2% in the second quarter. The consensus is that the economy is on track for a full year GDP increase of 3%.

 

The economy remains strong, without clear evidence of slowing. We have seen some wage increases which supports the belief that the labor market is tightening.  I find it interesting that employers are trying to fill 7 million jobs, and The Labor Force Participation Rate (LFPR) is at a historic low.  In fact, the ratio of people looking for work to jobs available is .9.  In other words, for every 100 available jobs, 90 people are actively seeking employment.  The U.S. labor market has enough slack to accommodate the demand for labor, or so it seems.  So, why haven’t those jobs been filled by the people looking for work?   There is an obvious disconnect between the demand for labor, unemployment, and the LFPR.  Call it a Demand-Unemployment-LFPR Paradox.

 

FIVE REASONS FOR THIS PARADOX.

Lack of appropriate skills

Structural unemployment

Disability and chronic illnesses

Opioid epidemic

Baby boomers are retiring

 

I find these reasons interesting if not compelling. I can understand the effect of disability and chronic illness, especially high blood pressure and diabetes.  The effect on the labor pool includes the afflicted and their caregivers. Personally, I would include people who are chronically addicted to drugs, including opioids, as disabled at least temporarily. These issues require Public Policy initiatives at the Federal and State levels.

 

About “lack of appropriate skills,” the issue is clear.  If an employer is looking to hire software engineers, it is unlikely that a middle-aged, displaced factory worker would be a viable candidate.  This is an obvious example however, it doesn’t explain the bulk of the paradox.

 

I find the issue of retiring Baby Boomers most interesting as there are conflicting signals regarding their situation. The first is that we are healthier than previous generations and highly motivated to contribute.  Additionally, I continue to hear reports from financial planners that the average baby boomer has somewhere between $10,000 and $50,000 in savings, hardly enough to support retirement.  The effects of divorce and unemployment have diminished the financial security for many Baby Boomers.  Admittedly, many are leaving the corporate world and government service with pensions. However, Baby Boomers I encounter are not ready to retire even if they have the financial resources to do so.

 

Structural Unemployment is a euphemism for age discrimination, whether real or perceived.  In some cases, it may be due to a perceived lack of relevant skills.  In other situations, it may be due to salary requirements.  The lack of relevant skills is a perception that seniors are not as savvy using technology as younger workers.  I find this questionable.  On the other hand, seniors probably have expectations for a greater wage than the market may support.   A good example is the demand to raise the minimum wage by displaced workers who were forced to find employment in Quick Service Restaurants during the recession.  Hiring older workers carries risk, including health and vitality, and EEO complaints.  Of all the reasons to be disconnected from the workforce, I find this to be the easiest to overcome. As the economy continues to restructure itself to accommodate the digital revolution, employers are becoming more comfortable employing freelancers, or outsourcing job functions. This creates tremendous opportunities for anyone with relevant skills, like Baby Boomers, to create their own employment opportunities.

 

I believe it is a useful goal to create an economy that can employ everyone that wants to work.  I believe in policies that provide incentives for people to work.  Our current economic environment has challenges and opportunities.  The clearest opportunity is for Baby Boomers and those affected by Structural Unemployment to turn perceived weaknesses into strengths and embrace the digital economy.  Corporations may take the lead in addressing the skills gap by providing training and development programs.  Public Health Policy must become more robust to address chronic illness and addiction.  It occurs to me that the Labor Paradox can be bridged, but it will take significant effort.

 

Addendum: Understanding The Bureau of Labor Statistics Reports on Unemployment and LBFR

 
The Labor Force Participation Rate (LFPR) is derived from a survey of the number of people available for work as a percentage of the total population of possible workers. In October 2018, that rate was 62.9%. It measures the amount of labor in an economy, one of the factors of production. The other three are natural resources capital and entrepreneurship. LFPR equals labor force divided by civilian non-institutional population.
As defined by the Bureau of Labor Statistics the civilian noninstitutional population includes everyone living in the United States who is 16 years or older minus inmates of institutions such as prisons, nursing homes and mental hospitals, and active duty military.
“Labor force” is everyone classified as either employed or unemployed.
“Employed” is anyone age 16 or older in the civilian noninstitutional population who worked in the last week, They are those who worked an hour or more is paid employees or 15 hours or more as unpaid workers in a family-owned business or farm,  It also includes those who have jobs or businesses but didn’t work that week because they were on vacation, sick or on maternity leave, on strike, or in training, or had some other family or personal reasons why they did not work. It doesn’t matter whether it was paid time off or not.   Each worker is only counted once even if they hold two or more jobs,  Volunteer work and work around the house do not count.
“Unemployed” are those age 16 or more who weren’t employed but are available for work and were actively looking for a job within the past four weeks.
People who would like to work but have not actively looked for work in the last month are not counted as being in the labor force no matter how much they want to job. They are counted in the total population.
The BLS does not track them.  It calls them “marginally attached to the labor force.” These are people who have looked in the past year but just not the previous month.  These people might have had school or family responsibilities, ill health, or transportation problems that prevented them from working recently.
Some of the marginally attached people in the survey are considered discouraged workers. This term is defined as people who have given up looking for work because they don’t believe there are any jobs available for them. Others have become discouraged because they lack the right schooling or training. They may be concerned that they are too young or too old to be of interest to potential employers. Some have suffered discrimination. They are counted in the real unemployment rate. Others who are included in the labor force are students, homemakers, retired people, and those under 16 who were working. Still, they are counted in the population.
Between 1948 in the 1990s, the LFPR had been increasing. Prior to 1963, the LFPR had been below 60%. As more women entered the labor force, the LFPR gradually increased to 61% by the early 1970s. It reached 63% in the 1980s and peaked at 67.3% in 2000. The LFPR fell to 66% with the onset of the 2001 recession. Following the financial crisis that began in 2008, the LFPR fell below 66% and has continued falling, reaching a low of 62.6% into 2015.
In her recent article, Kimberly Amadeo indicated that economists are divided as to how much of the recent drop in the LFPR was due to the recession.  Estimates range from 30 to 50% and as much as 90%. Many of the workers displaced during the recession never returned to the job market.

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