Economists question why potential workers leave labor force

A declining number of Nevada residents are interested in working even as new jobs are created, and state researchers want to know more.

Some of the decline may be a result of the recession, they say, because people who struggled to find work simply gave up and dropped out the labor force.

But economists think that other, deeper changes also may developing in the economy of Nevada and other states across the nation.

The phenomenon is getting increased attention partly because a permanent decline in the size of the workforce could carry big implications for employers who will be recruiting workers as the economy recovers.

Over the short-term, the question raises questions about the course of unemployment rates. If the economy continues to recover enough that discouraged workers return from the sidelines, unemployment rates might actually rise for a while even as the economy improves.

And of immediate interest to Nevada officials is this: The unemployment is falling it reached 11.4 percent in the Reno-Sparks area in April, compared with 12 percent a month earlier. But how much of this can be attributed to the development of new jobs, and how much is the result of a shrinking pool of workers?

The key statistic studied by researchers is the "Labor Force Participation Rate" the percentage of residents who consider themselves to be part of the labor force, no matter whether they currently hold a job.

The labor-force participation rate currently stands at 64.9 percent in Nevada, down from 67.8 percent at the start of the recession, says Bill Anderson, chief economist for Nevada's Department of Employment, Training and Rehabilitation.

Nationally, about 63.6 percent of the population considers itself part of the labor force, down from 66 percent at the start of the recession.

That's the largest four-year decline since economists began collecting the statistics, says Willem Van Zandweghe, a senior economist at the Federal Reserve Bank of Kansas City.

While analysts have thought that the decline in the labor-force participation rate in recent years was largely a result of discouraged workers who gave up the search for unemployment, the trend began long before the current recession.

In fact, Anderson says, participation in the labor force has been declining since the mid-1980s, when it peaked at nearly 74 percent of the population in Nevada.

That marked the reversal of a long trend that began in about 1970 as more women entered the workforce and members of the Baby Boom generation reached working age. In the mid-1950s, the labor-force participation rate nationally dropped as low as 50 percent before it started climbing steadily.

Van Zandweghe, who has dug deep in an effort to sort out the reasons that the labor-force participation rate has fallen so sharply, thinks that about half of the decline is the result of the recession.

While workers typically haven't bailed out of the workforce entirely during past downturns, the economist says that there's growing evidence that the number of people who gave up looking for work during this recession was greater than it was in the past.

The other half of the decline, Van Zandweghe says, probably reflects long-term changes in the structure of the American workforce notably, the retirement of Baby Boomers. The recession may have accelerated the permanent departure from the workforce of that generation.

(Offsetting this, he says, is the need of some retirement-aged workers to remain on the job, either because they need the money or because their health and energy allows them to keep working.)

Another factor: Young people tend to enter the workforce at a slightly older age than they did in the past because they stay in school longer. The labor-force participation rate tracks workers as young as 16 who have jobs or seek jobs.

Workers who return to the labor force after a long spell of unemployment present some issues beyond their immediate effect on the unemployment rate, says Van Zandweghe.

Often, their skills have eroded, they no longer feel as committed to holding a job and their networks of business associates have weakened.

That may be one of the causes for a recent surge in applications for disability benefits since 2009, Van Zandweghe says. Disability claims in 2010 were up roughly 50 percent nationwide from their level five years earlier.