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Older workers are exiting fast, shrinking the labor force, study says

By Kevin G. Hall, McClatchy Newspapers –

WASHINGTON — New research challenges the conventional wisdom that the unemployment rate is falling because workers have given up looking for a job and have exited the labor force, and the rate likely will climb again once these discouraged Americans renew their search for a job.

In a March 1 report titled “Dispelling an Urban Legend,” economist Dean Maki at Barclays Capital, part of the British financial giant Barclays, argued that the size of the U.S. workforce is shrinking as aging baby boomers hit retirement age amid a sluggish economy. This — not the so-called missing workers from the labor force — may be knocking down the jobless rate faster than expected.

“Based on our reading of the evidence, the conventional view that in recoveries the unemployment rate will stop falling and even start to rise because of surging labor force participation rates amounts to something of an urban legend,” Maki and his colleagues concluded. “Such an event has not happened in the past and we do not believe it will this time either.”

The jobless rate has fallen for five consecutive months and now stands at 8.3 percent ahead of Friday’s release of February jobs numbers by the Labor Department. A key private-sector gauge of employment, the ADP National Employment Report, was released Wednesday and showed a better than expected 216,000 private-sector jobs added last month. Historically, the ADP has been a good gauge of what the government’s report will show days later.

If the research from Barclays Capital is right, President Barack Obama’s re-election chances could get a big boost. Already, the falling unemployment rate has helped bring up his approval numbers in opinion polls, and gauges of consumer confidence are turning more positive.

Maki’s findings are not necessarily a great development, however, because implicit in a shrinking labor force participation rate is slower economic growth. A smaller labor force means a smaller economy, and Barclays Capital expects sluggish growth in the range of 2.5 percent this year and next.

In an interview, Maki said he expects the unemployment rate to keep falling this year, to end the year at about 7.8 percent. Next year the rate would fall to about 7 percent, according to his projections. That’s considerably better than the Federal Reserve Board’s January central tendency forecast, which put the unemployment rate at the end of this year between 8.2 percent and 8.5 percent, and next year between 7.4 percent and 8.1 percent.

“Really what this (study) is saying is, it is a lot easier to push the unemployment rate down than it used to be,” said Maki.

A Feb. 11, 2011, research note by economists at Goldman Sachs came to similar conclusions about what last year was a 9 percent unemployment rate. However, they said that some 200,000 new jobs per month were needed to get the jobless rate to 8 percent by the end of this year. Job growth has been weaker than that, yet the unemployment rate is at 8.3 percent.

“Economic recovery should draw some additional workers into the labor force in the next 1-2 years. But there is little evidence for the idea that an ‘unduly’ low participation rate is masking an even weaker labor market than indicated by the 9 percent unemployment rate,” the Goldman economists wrote. “Instead, we find that most of the drop in participation in recent years reflects changes in the underlying demographics and the ‘normal’ effects of the economic cycle.”

The Barclays Capital research projected long-run economic growth around 2 percent, below historical trends and also below the Fed’s long-run central-tendency forecast of long-term growth between 2.3 percent and 2.6 percent. As a mature, advanced economy, U.S. growth rates tend to be far slower than up-and-coming economies such as China, India and Brazil. But slowing below historical trends carries all sorts of implications.

“That’s not a good thing, thinking about long-term budgets,” Maki said, suggesting the trend will strain federal tax revenues, thus heightening problems with deficits and debt. It also suggests strains on federal health and retirement programs such as Medicare and Social Security.

“This is the world we’re in now, and it’s best to fully understand these changes that are happening,” Maki said.

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