Saturday, May 5, 2012

Who Are the Missing 5.8 Million?

Greg Ip at The Economist's "Free Exchange" blog puts America's labor force contraction in a striking light: had the labor force participation not been affected by the recession, there would be roughly 5 million people in the labor force today than there actually are. Where, Ip asks, are these missing five million?
So what about the others? Is it early retirement? Disability? Returning to school? Illegal immigrants returning home (or failing to enter the country in the first place)? Or were they never there to start with - the labour force simply isn't growing as quickly as we thought it should, for demographic or other reasons? Whichever it is, it is a troubling sign that our economic potential could be a lot lower than we thought just a few years ago. And that's the real bad news from today’s report.
This post seeks to answer Ip's question, peeking inside the Bureau of Labor Statistics' detailed demographic numbers of the non-institutional population and labor force participation levels and rates, broken down by sex, age, ethnicity, and educational attainment.

Holding the December 2007 labor force participation rates constant -- Dec. '07 is when the NBER said the last recession began -- we can project forward to calculate the number "missing" from the labor force. Where P = non-institutional population, R = labor force participation rate in  Dec. '07, and L = labor force participation level in t months after Dec. '07:

# Missing = P*R - L

To summarize the findings, Ip's missing 5 million are disproportionately young (ages 16-19), male, nonwhite, and of low educational attainment as compared to their respective fractions in the American labor force.

Before we dive into the research, a technical note: because the CBO's labor force projections bend downwards into the future, i.e. the labor force growth rate slows -- and I am making projections based on the non-institutional population, my total headcount of the number missing differs slightly from Ip's. The different baseline leads me to conclude that 5.8 million are missing from the labor force.

By sex, 3.6 million men and 2.3 million women are missing from the labor force. Given that men compose 53 percent of the labor force, men are 15 percent overrepresented relative to women. Interestingly, the ratios of under- and over-representation between men and women has remained roughly constant as the number missing has grown -- and this is true for most of the other demographic breakdowns.By age, 1.3 million Americans between the age of 16 and 19 inclusive and 5.0 million above the age of 20 are missing from the labor force. Given that those between 16 and 19 compose 3.7 percent of the labor force, the young are 7 times overrepresented relative to the working-age.By ethnicity, 4.6 million white Americans, 0.8 million black Americans, 0.8 Hispanic Americans, and 0.6 million Asian Americans are missing from the labor force. Given that these ethnicities compose 71, 10, 14, and 5 percent of the labor force respectively, white Americans are 5 percent underrepresented, black Americans are 14 percent overrepresented, Hispanic Americans are 18 percent underrepresented, and Asian Americans are 90 percent overrepresented.FRED doesn't seem to have population data on the number of college and high-school degree-holders, or those with some college, but just by comparing the declines in their labor force participation ratios, it is obvious that high-school graduates are significantly overrepresented in the missing millions relative to college graduates and those with some college.

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