Where have all the workers gone?

Employment rates among prime-age workers, especially men, have declined sharply over the last few decades. The Great Recession made matters worse. Recent declines in the unemployment rate have enticed some back into the active labor force but the long-term picture is still discouraging. When we compare the U.S. to other advanced countries, working-age adults are simply not working as much as adults in most European nations.

What’s going on here? As my colleague Gary Burtless notes, three developments have probably played a role. First, real wages have fallen by 28 percent for high-school educated men since 1980, making work much less attractive, but also signaling that employers are looking for a higher level of skill. Second, the disability rolls have been growing (primarily because of musculoskeletal and mental health issues). Although getting onto disability is a long and involved process, the benefits compete favorably with what a low-skilled worker could earn and create a disincentive to re-enter the labor market. Third, now that women are almost half the labor force, the pressure for men to work has lessened.

In the shorter run, it’s hard to tell how much of the recent sharp drop in employment is related to weak demand and how much to these longer-term factors. Of course, the two are related. A further tightening of the labor market would relax employer hiring requirements and provide more opportunities and on-the-job experience for those with the fewest skills. But a rather large group may simply be unemployable at an attractive wage and may have figured out how to get by without working very much.

Here is what we know based on data from the 2014 annual survey of households in the U.S. (with income data for 2013). For the purpose of this analysis, I focus on those in the bottom one-third of the income distribution. The primary reason these households have low incomes is because the head of the household is not working very many hours. Almost a third are working less than half-time. Why are so many people who are in their prime working years so loosely connected to the labor market? Is it because they can’t find jobs or is it because they have other means of support?

Some answers can be gleaned from the reasons that the jobless give for not working. Among male heads of household between the ages of 25-54, 27 percent say it is because they are ill or disabled.

Since we excluded from the sample anyone on disability insurance, these must be people with health problems that are either short-term or not serious enough to qualify them for the government’s insurance program. Another 22 percent said they couldn’t find work – not too surprising in a year when the unemployment rate was still over 7 percent. The remaining half were either going to school, taking care of home or family, were retired (despite being under 55), or gave some other reason for why they weren’t working. Bear in mind that these are all men in their prime working years and that their lack of work leaves them and anyone else in their household at or near the poverty line. Because these are one-year figures, it’s possible of course that they are drawing on savings or are relying temporarily on family or friends to support them. It’s also possible that they are underreporting their incomes to the Census bureau. The data for women heading households are somewhat similar to that of men, with far fewer reporting that they are ill or disabled and more of them reporting that they are taking care of home or family.

These data are suggestive but don’t tell us what we really need to know if we want to reduce the proportion of households with low incomes. Our analysis suggests that a higher minimum wage or a tighter labor market, for example, would help this group — but only modestly unless it led to a much bigger expansion in their willingness to work than seems likely. Their biggest problem is not low wages or a lack of jobs per se; it is their short hours and lack of employment for reasons that remain somewhat obscure.

Editor’s Note: this piece first appeared in Real Clear Markets.