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Other Factors Add to Decline of Labor Participation

In the the 2007-to-2008 academic year there were 5.5 milion Pell loans. The average was for $2600. In the 2009-2010 academic year, the most current data, there were 8.1 million Pell loans. The average was $3700.

These loans are also of a special nature. Typically, they are ineligible for cancellation under personal bankruptcy. There are also tax credits up to $2500 a year. This has benefited some 9.4 million students in the 2009-to-2010 academic year.

While these are modest amounts compared to the cost of a college education, the main point is that an important part of the decline in the overall participation rate can be traced to the rise education enrollment. Educational institutions are fulfilling their economic function by keeping people out the labor market and increasing their skills.

55-Plus

There is another segment of the population that is also leaving the labor force at an accelerated speed. Since the onset of the crisis, there has been a sharp increase in the number of people, aged 55 years and older, who are not working and, by their own admission, do not want a job (Chart 2).

In part, this may reflect the beginning of the retirement of the Baby Boom Generation, but the marked increase since the crisis began suggests other forces may be at work. There is no concrete evidence that explains it, but it is reasonable to suspect that the economic conditions are such that some, for example, may be choosing early retirement and others may be starting their own businesses.

Data on loans against 401(k)s or early withdrawals, or liquidation of annuities, is only now beginning to be collected. There has been a rise in the value and number of loans from the Small Business Administration. In 2009, there were less than 50,000 such loans for a total of $14 billion. In 2011 there were more than 60,000 loans for about $25 billion.

Conclusion

There are of course far too many discouraged workers who want a job, cannot find one and have given up. They are also responsible for the decline in the participation rate. In February, the government estimated that there were over one million discouraged workers.

There has been a marked and unprecedented rise in the average length of unemployment. This raises all personal and social issues and raises the specter of important skills mismatch and the structural unemployment that may not be addressed by the mild cyclical recovery.

Yet evidence presented here suggests that the decline in the labor force participation rate is not just a function of discouraged workers, as many observers seem to assume.

There has been an increase in young adults who are leaving the labor market who do not want a job. This has lowered the participation rate, while increasing the investment in human capital. There has also been an increase in the 55+ age cohort that is leaving the labor market and do not want a job. This has also served to lower the participation rate.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
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