The Stagnating Labor Market, 1: Dropping Out Of The Labor Force

Sep 20, 2010Mike Konczal

mike-konczal-2-100New research from the Roosevelt Institute examines the current unemployment crisis.

Arjun Jayadev and I have another working paper out of Roosevelt Institute, this time focusing on the labor market in the current recession. The paper is: The Stagnating Labor Market (pdf). I hope you check it out; I'm going to talk about the main things we found in two posts.

Dropping Out of The Labor Force

This is what the labor market loops like. It is normally a dynamic machine where people transition between employed, unemployed, and out of the labor force. But recently sand has been thrown in the gears, and people's transitioning between these states is slowing, with more and more people ending up in not in the labor force and staying there.

Here is one of the scariest chart I've seen in this recession:

It's a little complicated, so let me explain. This is the percent of unemployment who leave unemployment every month and where they go. In normal times, you'll see 25%+ of unemployed transition to employed. This is robust to several ways of calculating this number. This high number is the result of, and a justification for, our comparatively weak social safety net for the unemployed.

But notice what has happened in this recession: Starting in January 2009 it is more likely an unemployed person will drop out of the labor force instead of finding a job. More people are leaving unemployment by simply leaving the formal labor force rather than ending up with a new job. This has massive implications for how we all should view the unemployment numbers.

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And notice that the sudden new normal of unemployed leaving the labor force instead of finding a job has been buffered by a sharp drop in the number of people leaving the labor force; this is no doubt in large part to the extension of unemployment insurance, which has incentivized people to continue looking for a job instead of leaving the formal economy.

To see if this is a new historical development, we use the data constructed by Robert Shimer's and available on his webpage (with an update from Shimer that goes to Q1 2010). The data from June 1967 and December 1975 were tabulated by Joe Ritter and made available by Hoyt Bleakley on Shimer's webpage. Here is both the outflows from unemployment and a separate chart that graphs the difference between the two (as with all graphs, click through for larger image):

Going back to 1967 this simply hasn't happened consistently before. (Certainly not at all before the weak recovery of the Bush years.) This is a brand new feature to this recession, and as such policy and research needs to be mustered to better identify this grouping of individuals and reintegrate them back into the labor force after the recession is over.

For our evidence shows the ability to find a job from outside of the labor force, normally a fairly reasonable thing to do, has collapsed:

The blue line is the monthly likelihood of going from outside the labor force to employed, which has slowed down. This transition is very evident of populations like the young, whose unemployment rate is skyrocketing.

While the out of the labor force population increases:

With massive human capital depreciation for those who find themselves outside of the labor market and a possible hysteresis in unemployment for all of us, where high unemployment generates a higher NAIRU, this is a problem of massive proportion that isn't captured in normal statistics or in our normal policy discussions.

Arjun Jayadev and Mike Konczal are fellows with the Roosevelt Institute.

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