Why Tight U.S. Labor Markets Are Here to Stay

July 24 (Bloomberg) -- The outlook for the labor market remains bleak. Older Americans are holding on to their jobs longer, limiting openings for newcomers, and employers are cutting costs by extending working hours and paying overtime, rather than hiring.

Layoffs and discharges remain low. Voluntary departures have risen a bit, but are still sluggish as workers stay put in uncertain times. Meanwhile, job openings have risen rapidly after a collapse, though new hires have increased much more slowly. After firing so many people in the recession and since, employers are waiting to hire the right people with the right skills.

Declining real wages also discourage many from entering the labor force, as does the likelihood that if they do find work, it is often at lower pay. Surveys show that of those out of work six months or more, a third earn less when they find a new job. Those out of work for extended periods also tend to lose their skills.

People out of the labor force for nondemographic reasons react to the push of few job prospects and the pull of alternative forms of compensation. If physicians certify job-related disabilities and judges approve them, people can draw disability benefits until they reach normal retirement age, when they are eligible for Social Security retirement benefits.

Government Benefits

In June, almost 11 million people collected disability benefits, up from 3 million in 1970. In addition, disability benefits are higher than earlier in relation to wages. Many states try to shift people off the welfare and Medicaid rolls, which are the states’ financial responsibility, toward disability, which is paid for by the federal government. Some unions encourage their unemployed members to apply for disability coverage.

In a related area, the percentage of the population on welfare rose to 4.7 percent in 1990 from 1.4 percent in 1950. That changed after workfare, requiring able-bodied people drawing welfare to hold jobs or be in job-training programs, was introduced by various states, and later adopted by the federal government. The number of those on the welfare rolls fell overnight, to 2.1 percent of the population in 2000.

It remains to be seen if the recent decrease in maximum unemployment benefits to 73 weeks from 99 weeks will spur job-seeking. Meanwhile, drawing Social Security benefits has become more attractive. The payments have been adjusted for cost of living increases since 1975. Because of the lack of inflation, there were no increases in 2010 and 2011, but there was a 3.6 percent adjustment in 2012 and a 1.7 percent revision this year.

The number of recipients of the Supplemental Nutrition Assistance Program, known as food stamps, jumped to 47.8 million in December from 28.2 million in 2008, a 70 percent increase. The unemployment rate peaked at 10 percent in October 2009. SNAP keeps growing, however, as states make it easier for people to apply because the federal government pays the cost.

That cost rose to $74.6 billion last year from $30.8 billion in 2007. In 2006, 18.7 percent of SNAP households qualified through an easier screening program that doesn’t check assets, much like the “no doc” subprime mortgage loans of yesteryear. In 1975, 8 percent of Americans received food stamps, today, 15 percent do. The number of people below the poverty line rose to 48.5 million in 2011, from 37.3 million in 2007, but that accounted for just half the rise in SNAP enrollment.

Job Market

With all these government benefits, many people find they’re financially better off at home and out of the labor force than out looking for a job or working at low wages, considering commuting costs, child-care outlays and other job and job-hunting expenses.

My company’s research has found that, based on post-World War II history, it should take 3.2 percent real gross domestic product growth just to keep the unemployment rate steady -- meaning that at the current growth of about 2 percent, the unemployment rate would rise more than one percentage point a year and now would be 12 percent. Instead, it was 7.6 percent in June. Federal Reserve Chairman Ben S. Bernanke, among others, has struggled to explain why the unemployment rate has declined in this recovery while economic growth is so slow.

There is, however, a logical explanation for the huge differences between the actual unemployment rate and the higher expected rates: a big drop in the participation rate. As discussed earlier in this series, the decline in the labor participation rate to 63.5 percent in June from its February 2000 peak of 67.3 percent means there are 9.5 million fewer people in the labor force today than if the participation rate had remained at 67.3 percent.

With the number of people currently employed, that would push the unemployment rate to 13 percent. So the current low unemployment rate relative to the historical expectation appears to be the result of the decline in the labor participation rate.

Many of the 2 million people who have left the labor force in the past two decades for nondemographic reasons will probably never re-enter. Yes, some youths may decide that college is a poor investment and will get trained and enter the labor force as skilled craftsmen. Lower unemployment benefits may spur others to seek work.

Nevertheless, many may continue to live without jobs, relying on welfare and disability benefits. Others may continue to be discouraged by weak job markets. Many have lost their job skills due to prolonged unemployment, while others who were involved in residential construction and other shrunken trades are too old to learn new occupations. Unlike Bernanke, I believe that putting people back to work isn’t simply a matter of creating more aggregate demand. There are also meaningful structural problems.

Robust Growth

Still, if those 2 million don’t re-enter the labor force, it probably won’t impede robust real GDP annual growth of about 3.5 percent once the age of deleveraging is completed in about five years. As discussed in the first part of this series, with 2.5 percent annual productivity growth, employment would need to increase 1 percent annually. That’s about 1.44 million more workers a year.

But the working-age population in future years is projected by the Bureau of Labor Statistics to rise about 2.2 million a year. With the current participation rate of 63.5 percent, that would produce 1.4 million new job-seekers, about equal to new labor demand, assuming these new entrants’ skills match those in demand.

Most of the decline in the labor force participation rate since its 2000 peak was due to the aging postwar babies. The rest resulted from poor job markets, which encouraged many youths to stay in school. Others -- young and old -- were discouraged by miserable employment prospects and drawn to attractive unemployment, welfare and disability benefits. But despite continuing structural unemployment problems, new entrants should keep labor markets well-supplied, even when faster economic growth resumes.

(A. Gary Shilling is a Bloomberg View columnist and president of A. Gary Shilling & Co. He is the author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” This is the third in a three-part series. Read Parts 1 and 2.)

To contact the writer of this column: A. Gary Shilling at

To contact the editor responsible for this column: Max Berley at

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