A different view of the labor market
The official US unemployment rate excludes some notable segments of the working-age population.
A better picture of the labor market emerges when you consider another set of data from the Bureau of Labor Statistics, called U6, which includes the officially unemployed, people who are working part time but would prefer to work full time, and “marginally attached” workers who have looked for work over the year but grown discouraged. In May, the U6 stood near 8 percent, almost double the official unemployment rate.
Furthermore, some economists are alarmed by the labor-force-participation rate, which the BLS defines as the percentage of the total population aged 16 and above that is either employed or officially unemployed. That plummeted from a peak of about 68 percent in April 2000 to a low of 62.5 percent in November 2015, and hasn’t climbed much since. It indicates that an aging population aside, many able-bodied individuals have simply left the labor market.
According to the Organisation for Economic Co-operation and Development, the US ranked 39th in labor-force participation for prime-age workers in 2015, the latest year for which data were available. In this measure, the US trailed even the much smaller economies of Greece, Bulgaria, and Romania. And Maximiliano A. Dvorkin and Hannah Shell at the Federal Reserve Bank of St. Louis found in 2015 that the US was the “only country in our sample experiencing a recent decline in the aggregate labor force participation rate.”
The US is “doing much worse” than advanced European countries including France, Germany, and the United Kingdom, says University of Pennsylvania’s Ioana Marinescu. Even though France, for example, has a much higher unemployment rate than the US—10 percent, as of January 2017—“more people are working in France as a percentage of the prime-age population than in the US, and to me that shows there’s something really worrying about the US economy.”
For years, many believed they were seeing a cyclical problem, the result of a deep recession that trailed a financial crisis. Ben Bernanke, then chairman of the Federal Reserve, initially accepted the classical Keynesian explanation that high long-term unemployment and low labor-force participation were caused by a huge shortfall in aggregate demand.
Toward the end of his tenure, however, he worried that structural factors were playing a big role and that high unemployment and underemployment “damage the productive potential of the economy as a whole by eroding workers’ skills and . . . by preventing many young people from gaining workplace skills and experience in the first place.”
In retrospect, we can see that the housing boom masked the structural change. When manufacturing was shedding jobs, boomtowns such as Las Vegas, Phoenix, Miami and Tampa in Florida, and California’s Central Valley put people to work in construction. But when 2 million construction jobs disappeared from August 2006 to July 2010, it revealed the weakness in the labor market, especially among relatively unskilled workers who hadn’t gone beyond high school. “Employment rates for prime-age workers are well below historical levels, and for the men they’re at historically low levels,” says Chicago Booth’s Erik Hurst.
The statistics and data affirm the message voters collectively sent politicians last fall: many people want jobs, and better ones.
Needed: Skilled workers
Meanwhile, on the labor-demand side of the economy, the situation looks entirely different. There were 5.5 million job openings nationwide this past December, according to the BLS. Even in manufacturing, the sector that has suffered the biggest job losses, employers complain of a dearth of prospective employees with the requisite skills. A 2015 report by the Manufacturing Institute projected that retirement among skilled workers and lack of training among younger ones will leave 2 million manufacturing jobs unfilled by 2025.
Companies are willing to pay well to fill open positions—if people have the requisite skills.
The wages of low-skilled or unskilled workers have stagnated or fallen, but “individuals near the top of the wage distribution enjoyed rapid and sustained wage growth,” write Chicago Booth’s Kevin M. Murphy and Robert H. Topel. In fact, “market fundamentals favoring more skilled workers are the driving force behind rising inequality.”