In August of 2012 the U.S. labor force participation rate sank to 63.5 percent, the lowest mark recorded in the past 30 years. The declining labor force participation rate is occurring at the same time the unemployment rate is dropping; the rate of unemployment has fallen from 10 percent in October 2009 to 7.8 percent in December 2012.
How are the falling unemployment and labor force participation rates related? To answer this question it is useful to examine what it means to be in the labor force, and also what it means to be unemployed. According to the definitions of the Bureau of Labor Statistics, to be in the labor force somebody must either be employed or unemployed. This seems straightforward, but we also need to understand that being “unemployed” does not simply mean not having a job. To be considered “unemployed” a person must not only be out of work, but also must be willing and able to work. A person is not counted as being in the labor force or as being unemployed if he decides he no longer has any desire to find a job. As a result, when a person without a job decides he is no longer interested in looking for work, then both the labor force participation rate and the unemployment rate will simultaneously fall.
An examination of the data reveals that labor force participation rates have declined most dramatically for young adults. According to the Bureau of Labor Statistics (http://www.bls.gov/emp/ep_table_303.htm), labor force participation rates for the cohort ages 16 to 24 have declined from 65.4 percent in 2000 to 55.2 percent in 2010.
One explanation for the recent drop in labor force participation is that job-seekers have become discouraged, and therefore simply quit looking for work. But, we think there may be another, greater force at work here. In the case of young adults, the decline in labor force participation is very sharp. Many observers believe this may be a consequence of an increase in the number of students attending college—a full-time student is not part of the labor force if he/she is not interested in working while going to school.
Not coincidently, at the same time young people are exiting the labor force the amount of student loan debt has skyrocketed. Student loan debt is increasingly owed to the federal government, as private lenders are unable to compete with the attractive loan repayment plans offered by Uncle Sam. In fact, the U.S. Department of Education encourages students to eschew private lenders, and promotes their own their own taxpayer-financed loans instead. Quoting from the Department of Education’s website (http://studentaid.ed.gov/types/loans/federal-vs-private), “when it comes to paying for college, career school, or graduate school, federal student loans offer several advantages over private student loans.” The Department of Education lists many of the benefits of federal student loans when compared to private loans. For example, the Dept. notes that private loans may require a credit check, whereas “you don’t need to get a credit check for most federal student loans.” Another so-called advantage of federal loans is that “you may be eligible to have some portion of your loans forgiven if you work in public service. Learn about our loan forgiveness programs.” (Read, don’t worry too much about whether or not you can pay back the loan—taxpayers have you covered).
Is it any wonder the growth rate in GDP is miserable? The U.S. government and its money-creating ally (the Federal Reserve) are great at finding ways to encourage people to avoid productive employment. Going to school through student loans, which may never have to be repaid, is a big deterrent to entering the labor force. But, there are many other ways to get some cash without breaking a sweat. For instance, part of the deal that was cut to resolve the “Fiscal Cliff” involved maintaining the availability of “extended” unemployment benefits. Simple economic logic suggests increasing the duration of unemployment benefits does little to encourage people to accept less-than-desirable work. Instead, like Eddie in the movie Christmas Vacation, it is better to hold out for a “management position.”
Will our economy ever again experience robust growth? It may, but only if the federal government stops distorting incentives and discouraging productive people from working. Printing money and throwing it around willy-nilly isn’t the way to promote a healthy economy. Private markets should determine who gets student loans and who doesn’t. And, the hurdle rate on student loans should be high—at least as high as what could be earned by owning a diversified portfolio of capital assets. In such a world, a potential borrower would have to carefully weigh the costs and benefits of the borrowing decision. Ultimately, things get properly balanced only when we get government out of the lending business, and also out of the money-printing business. Read Capital as Money!