WASHINGTON (Reuters) - It’s a mystery with many plausible solutions: Why did 1.2 million Americans drop out of the labor force over the past three months?
Had they stayed in the job market, the unemployment rate would have hit 10.2 percent in July, not the 9.5 percent that the Labor Department reported on Friday.
Depending on why they left, this could have positive or negative implications for the broader economy. Did they go back to school to develop more marketable skills, or was it merely the fleeting promise of temporary Census jobs lured workers back earlier this year?
“It’s part of the ongoing syndrome of the longer the labor markets stays stuck in the bottom of a hole, the more people are discouraged,” said Bill Cheney, chief economist at John Hancock Financial in Boston.
Friday’s July employment report listed 1.19 million discouraged workers, compared with 796,000 a year earlier. The Labor Department defines discouraged workers as those who did not actively look for work in the prior four weeks because they could not find work, lacked training or faced discrimination.
Those discouraged workers are part of the reason why the percentage of people actively in the labor force has fallen so dramatically in the past three months.
The labor force participation rate dropped to 64.6 percent in July, matching the lowest level since 1985 and down 0.6 percentage point in the last three months alone.
That rate has been gradually declining since 2000, the height of the dot-com boom, when it peaked at 67.3 percent. Not surprisingly, the pace of decline picked up shortly after the September 2008 collapse of Lehman Brothers, which ushered in a darker phase of the recession and heavy job losses.
But by December 2009, the participation rate appeared to have bottomed out at 64.6 percent, and it rose for the first four months of this year before reversing in May. It has now fallen for three consecutive months.
“We just haven’t got enough momentum there in the private jobs to convince people that things are turning around,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
Discouraged workers may become angry voters in November’s congressional elections, which does not bode well for President Barack Obama’s Democratic party, currently holding large majorities in both chambers of Congress.
Ironically, the dropouts are keeping the unemployment number below the psychologically significant 10 percent mark, so it could be a blessing in disguise.
The longer people stay out of the work force, the more their skills decay and the harder it becomes for them to find work again. That is why economists generally view declining labor force participation as a negative sign.
The timing of this recent decline is somewhat suspect. It coincided with the peak of the 2010 Census hiring, which suggests some workers jumped back into the labor pool in search of those temporary jobs.
It also could be that workers saw relatively strong economic growth in late 2009 and early 2010, but then gave up the search when the recovery appeared to be faltering in May.
A dig through the data shows men and women dropped out of the labor force at similar rates over the three-month period.
One group that stands out is teenagers. They left at about double the rate of the overall workforce, although they bucked the trend in July with a rising participation rate.
Just 34.6 percent of 16- to 19-year-olds were in the labor force in July. A decade ago, the participation rate for that age group was above 50 percent.
“By the end of that cycle in 2000, basically you just had to be breathing and you could get a job,” John Hancock’s Cheney said.
The drop in the teen labor force may be a bit of good news if it indicates young people choosing to attend college rather than going straight to work in the middle of a lousy labor market.
The Labor Department reported in April that 70.1 percent of high school graduates ages 16 to 24 were enrolled in college as of last October, the highest rate in the series that dates back to 1959.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said if teens are indeed staying in school, that would be a hopeful sign for the economy because their job prospects and earnings power are likely to be higher.
The overall jobless rate for those with at least a bachelor’s degree was 4.5 percent in July. For those with just a high school diploma, it was 10.1 percent.
Cheney said it would make sense for young people to choose college over work when there are not enough jobs to go around, and hopefully the labor market will look much healthier once they graduate.
“The cost of college is way lower if there’s no way to make any money instead,” he said.
Editing by Neil Stempleman