Has Unemployment Really Fallen?

...retirement is not the answer...

The Financial Times has a good April 17, 2012 article looking at the sources of continued high unemployment and declining labor force participation.

On the unemployment side, there are structural arguments—workers live in the wrong places, have the wrong skills—and cyclical arguments. The article finds a bit of both, with the suggestion that the latter is pretty strong.

A drop in participation can potentially mask far higher underlying slack in labor markets, as people give up looking for jobs, or return to school (and stop looking for jobs), or retire (and, duh, stop looking for jobs). But to be counted as "unemployed" in our monthly labor force survey you have to be actually job hunting, not merely job dreaming. My own calculations show participation has dropped 2.2%, using the average going into the Great Recession and the average of the past 6 months. If all those would in fact have temporarily given up on finding work and so are counted as unemployed, that would push the current rate from 8.1% to 11.5%.

Other countries use similar methods while differing in details, such as how recently you have to have undertaken concrete job search efforts. Japan uses two weeks, the US four, and so unsurprisingly Japanese unemployment tends to look low from a US perspective.

Technically they are NILFs, Not In the Labor Force. But how many of those who have officially exited the labor market retired according to plan? The higher that number, the less that this shift in participation matters.

A block of the baby boomers have now hit age 62 and thus can potentially begin collecting their Social Security pension. Leaving aside the possibility that many had no intention of retiring, how much of the bump in NILFs is due to people age 62 and above? I'm doing such calculations for Japan and will post those results in due course to my Japan and Economics blog. Unfortunately, comparable age-specific data are not publicly available for the US. The gist of the FT article is that (unfortunately) intended retirement is not the cause.

The recession, in other words, remains really bad. The graph below thus projects the pace of recovery in employment using pre-recession employment-to-population ratios. At the current pace, we'll be back to par in 2016, assuming the the rapid pace of recent months continues unabated for the next four years.

...Mike Smitka...

Note: Another component of the drop in participation is due to those who qualify for disability pensions and actually "retire" and start claiming them. While some of that is because of the onset of disability, some is a function of the difficulty for an older individual to land another job. leading them to drop out of the labor force (become a NILF) and claim a pension. Herman Schwartz, a political scientist at UVA, has looked at this in the European context, and finds strong evidence that in hard times (or when unfavorable adjustments are made in the rules of regular retirement pensions) those who claim disability increases, indeed increases a lot. Of course that means that people aren't naturally welfare cheats, to use current US labels: lots of people who could retire due to age or disability in fact don't. Most people prefer work to just sitting around...