The Incredible Shrinking Workforce

The U.S. is two million workers short of where it should be. Many are on disability—or the couch.

When the latest jobs report comes out Friday, look beyond the top-line number. For months now economists have suggested that the low unemployment rate—4.1% as of last month’s report—implies that America is at or near full employment. Yet the labor market is still below its prerecession peak, with about two million jobs missing. Many of those workers have joined the disability rolls. Others have simply dropped out of the workforce in favor of leisure time.

The best evidence that the economy isn’t at full employment is that it is creating too many jobs. When the economy is recovering from a recession, employment grows faster than the population does, making up for jobs previously lost. In contrast, at full employment, job growth equals population growth, keeping employment rates steady. Which situation holds today? During the past three months, the U.S. economy has added jobs at a rate that is about double what’s needed to keep up with population growth. This implies the labor market is still recovering.

Another indicator is the employment rate, defined as the proportion of Americans 16 and older who are working. It is always less than 100% because some people of working age are retired, in school, or in other nonmarket activity. Just before the 2007 recession, the employment rate peaked at 63.4%, meaning in that boom time over one-third of the working-age population wasn’t working. The rate reached a low of 58.2% in November 2010, and it has now recovered to 60.2%. Still, that’s more than 3 percentage points shy of the prerecession peak.

Some of the difference reflects changing demographics.

But one statistic makes clear that the missing jobs are not solely a reflection of demographics. The employment rate of people age 25 to 54 is lower than at the prerecession peak by 1.3 percentage points. Even adjusting for demographics, the overall employment rate is still about 0.8 percentage points shy of where it would have been in prior peaks. There are about 256 million Americans who are 16 and older, so the job deficit works out to about two million.

Among young men, whose employment is low by historical standards, disability is not a major factor. Evidence suggests that many young men are opting to spend their time at home in leisure activities, perhaps because their job opportunities are poor. That reflects a lack of skills suitable for a modern economy.

Many analysts, along with President Trump, have argued for increased vocational training, which brings to mind blue-collar professions in manufacturing and the trades. This is too narrow a view. American schools could provide people who don’t go on to college with skills that are more useful in a modern service economy, instead of the watered-down and impractical academic curriculum currently offered. Better skills-based training would raise worker productivity and wages, reducing the incentive to go on disability or to choose leisure over work.

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