On Friday, January 9th, a disappointing jobs report came out showing only 74k new jobs were created in December, instead of the more than 200,000 that economists were expecting. While the unemployment rate fell to 6.7%, the lowest since 2008, this was due to more people leaving the labor force. The decline in the labor force participation rate in December ( 62.8%) resulted in this statistic reaching a level last seen in 1978. While some would like to lay this impact at Obama’s door (and as President for the last 5 years, he is not blameless), the fact is that the labor force participation rate has been falling since peaking in 2000 at around 67.3%. Clearly something else is going on than just the Obama Administration. And whatever is going on is not likely to be politically insignificant.
If one looks at the numbers, one will find that 63 million were not in the labor force in 1990. Today, 91 million are not in the labor force. If labor force participation rate were 66.3% (as in 1990, around the same time as another recession), there would be 8.8 million more people in the labor force today. This number represents 2.8% of the U.S. population; a segment that has just given up. To put this into perspective, if we were to have a war that killed the same percentage of our population as WWII did, we would be looking at about 1 million dead (i.e. they would have “dropped out” of the labor force). The effects of the last 20 years are as if we had a foreign war that was almost 9 times as bloody as WWII. This is a tremendous amount of lost output, and an additional strain on our social welfare system.
Unlike those who are disparaged in some quarters as lazy, these dropouts are not lazy, but more likely depressed. They are the sort of people who have tried, failed, and have been beaten down. When one is unemployed for long periods, one simply stagnates. For the ones who had skills once upon a time, their skills degrade. Even if they are able to claw their way back into the labor force somehow (an outcome by no means guaranteed), their life path has been irreversibly altered. They will most likely never enjoy the success that they could have had, and the economy will not benefit from the wealth that they could have created under other circumstances. In short, some of the human capital that they possessed, a major factor in economic growth and societal prosperity, has been irretrievably lost.
Long-term politically, this may not be an insignificant development. A person who has tried hard, failed, and given up is a person who has lost faith in the American system. This alienation may take several forms, none of them good. A person who feels that a system has failed him may not support or defend that system and support people promising radical solutions. Or the person may become a permanent welfare case, maintaining that he is owed this support by a system that has failed him (and vote accordingly). Or in extreme cases, such a person may even turn to violence as an expression of frustration. While these 8.8 million people are not going to overthrow a system supported by the other 309 million Americans, the fact is that recent years have seen many indications that more and more Americans are feeling alienated, one of the most prominent expressions of this being the Tea Party. If present trends continue and the economy continues to struggle to create jobs for a growing population, this 8.8 million group is going to grow. If left unchecked, this segment could potentially grow to the point that it would be a challenge to social stability. The good news is that such an outcome is not pre-ordained. The economy could start creating jobs again and this trend could be reversed. Policies that drastically reduce the regulatory burden on businesses enabling them to grow faster and hire more people would be a step in the right direction. Only time will tell.