Baby-boomer retirements are skewing the nation’s unemployment rate, but not enough to disguise a weak economy, according to a new report.
The left-leaning Economic Policy Institute (EPI) says the slow exit of baby boomers is a factor in the declining jobless rate, and its overall conclusion is that the economy is still quite sick.
EPI’s report could become a talking point for the GOP in the messaging fight on the economy between President Obama and former Massachusetts Gov. Mitt Romney (R).
Republicans and EPI certainly don’t agree on much. For example, EPI has long argued that the government should embrace expansionary policies to generate more demand for workers. Republicans, at least in recent years, have strongly opposed government stimulus proposals.
EPI estimates only one-third of the drop in the national labor participation rate, which measures the share of working-age people who either have a job or are jobless but are actively seeking work, is related to baby-boomer retirements and other structural changes to the workforce.
If the rate is largely dropping because the weak market has made people give up searching for a job, it bolsters the Republican argument that Obama is presiding over an extraordinarily weak recovery and that the fall in the unemployment rate is basically a mirage.
What’s more, if the economy heats up, one could expect the unemployment rate to rise as people come back to the workforce.
However, if the drop in the rate has more to do with changing demographics, it would suggest the workforce is changing. Under this scenario, the rate is less likely to spike if the recovery heats up.
“I think it’s important in trying to determine how real the decline is in the unemployment rate,” said Mark Zandi, chief economist for Moody’s Analytics.
In recent months, the falling unemployment rate has been coupled with sluggish job growth. The economy added only 115,000 jobs last month, a figure not seen as enough to keep up with population growth and not nearly large enough to make up for the approximately 8 million jobs lost during the recession. Zandi’s early prediction for May is that the economy will add 170,000 jobs.
The only reason the unemployment rate has fallen, Romney said earlier this month, is because of the number of people dropping out of the workforce because they can’t find jobs. “This is not progress,” he said dismissively.
He promised in an interview published Wednesday that the unemployment rate would reach 6 percent by the end of his first term in office. The Congressional Budget Office projects a 6.3 percent unemployment rate in 2016 under current policies.
The last jobs report found the labor participation rate had fallen to 63.6 percent, its lowest in more than a decade. Labor participation in the United States had been rising for decades as women entered the workforce.
Labor-market experts have been grappling with how much the drop in labor-force participation reflects demographics and how much is attributable to a bad job market.
Zandi, who backed the 2009 economic stimulus package and called on the administration and Congress to extend unemployment benefits and the Bush tax rates in 2010, argues the 1 percent drop is mostly real.
Zandi, who advised Sen. John McCain (R-Ariz.) in his 2008 presidential bid, believes the larger percentage of the drop in the labor participation rate is due to demographics.
“At least half of it is structural, the aging of the population,” he said in an interview.
The warning in EPI’s report is that “missing” workers are unlikely to enter the labor market until job prospects are strong enough that they will not face months of fruitless job searching.
When the workers do return, EPI expects the unemployment rate to rise. No president since FDR has been reelected with the unemployment rate above 8 percent.
In order to get a sense of the “real” unemployment rate, EPI’s Heidi Shierholz points to the employment-to-population ratio for workers aged 25 to 54 — so-called “prime-aged” employees.
Nearly 80 percent of those workers were employed before the recession. Now the figure is closer to 76 percent.
“These are the people that are going to be the most affected by the job market,” Shierholz said.
In a somewhat counterintuitive finding, EPI research didn’t find a sharp spike in college enrollment when the recession began and the economy began shedding more than 500,000 jobs per month. Instead, Shierholz said, rising enrollment is part of a decades-long trend in which more people are going to school.
While some people have returned or decided to attend school because of the ailing economy, they’ve probably been offset by those who couldn’t afford to go or to stay in school.